CDs vs. Bonds: What’s the Difference?

CDs are savings accounts; bonds are loans where you're the lender.
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Bonds vs. CDs

Here's the main difference between a bond and a CD: A bond is an investment that earns a fixed interest rate for loaning money to a company or government, while a CD is a deposit account at a financial institution that earns a fixed interest rate. Bonds and certificates of deposit are generally safe ways to earn returns on your savings, but they play different roles in your financial life. Here’s what to know.

First, what are CDs and bonds?

  • A CD is a type of savings account in which you agree to lock up some of your money at a bank or credit union for a set period, typically three months to five years. At the end of the period, the CD matures and you get back your money plus interest earned. You tend to earn more interest in a CD than in a regular savings account. There’s usually a minimum amount you need to deposit, which varies by bank.

» Learn more about how CDs work

  • A bond is a loan to a company or the government. As with a CD, you tie up your money for a fixed term in exchange for interest at a fixed rate, but unlike a CD, a bond typically can be sold before it matures. Bonds tend to be issued in increments, usually of $1,000. While it’s possible to buy individual bonds, many people choose to purchase them through bond mutual funds, which offer lower-cost access to a diversified group of bonds. (For more, see our explainer on bonds.)

When to open a CD

1. You want to lock up savings for short-term goals. If you’re setting aside money to buy something like a car or house in the next few years, a CD can be a solid, hands-off approach. As a guard against tapping in to that money, CDs have early withdrawal penalties; for example, you could lose three to six months’ worth of interest. (If you'd rather keep adding funds to an account instead of locking up savings at a fixed rate, check out our list of high-interest savings accounts.)

2. You want to get guaranteed returns without much risk. CDs — or share certificates, as credit unions call them — have federal insurance to at least $250,000 per account. So if the bank or credit union went bankrupt, you would still get your money back. Plus, a CD’s rate of return is fixed, which makes CDs appealing for people who want to shield some of their income from the fluctuations of the stock or bond market (for instance, after taking distributions from a pension or retirement account).

Ready to choose a CD?

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When to consider bonds

1. You want your investments to have a cushion against stock market volatility. Odds are if you have a retirement account such as a 401(k) or IRA, you already have money in bonds. If retirement is some 30 years away, you might choose to invest your retirement account more heavily in stocks than in bonds, since you have time to weather stock market fluctuations and benefit from stocks’ typically higher average annual return. Once you’re closer to retirement, you might choose to weight your investments more toward bonds, since the more bonds you have, the steadier your return generally becomes.

While stocks tend to provide more short-term fluctuations and higher long-term value, bonds can act as shock absorbers for a portfolio. Choosing how to invest money in different types of investments is known as asset allocation.

2. You want to generate steady income over time. Bonds are considered a “fixed-income investment” because the bondholder — that’s you — generally receives interest payments in regular installments, such as every six months. And when bonds are held to maturity, you’ll also get back the full amount you paid.

» Want to give a bond as a gift? Learn about savings bonds

However, comparing individual bonds may be challenging. The value of bonds changes often, and rates of return vary by the duration and type of bond. Plus, depending on the bond, there might be risk of a company going bankrupt.

Apart from U.S. Treasury bonds, you normally would buy individual bonds only if you had enough money to build a diversified bond portfolio, and that can require a significant sum of six figures or more.

» Want to know more? Here’s a guide on how to buy bonds

Compare at a glance

CD

Bond

Issuer

Bank or credit union.*

Varies by type of bond, such as:

  • Federal government for U.S. Treasurys.

  • State or local government for municipal bonds.

  • Companies for corporate bonds.

Typical terms

3 months to 5 years.

1 year to 30 years.

Rate of return

Varies; see the best CD rates for current yields.

Varies; check Treasury rates for current yields. There’s also variation for other bonds and bond mutual funds (e.g., a fund’s goal might be to match bond market performance or focus on a narrow set of bonds).

When do I typically receive interest?

Once the CD matures. This is the default for standard CDs and lets you take advantage of compound interest. (See what you could earn with our CD calculator.) Depending on the bank, you could have an alternative option of receiving regular interest payments.

In regular installments until a bond matures. (See what you can earn using our savings bond and Treasury calculators.)

Penalty for accessing funds?

Yes, early withdrawal penalty tends to be several months' worth of interest, or more. (Learn about the exception: no-penalty CDs.)

Potential risk in losing value if you're selling bonds instead of waiting for them to mature.

Money protected?

Yes, CDs have federal insurance of up to $250,000 per customer at an insured bank (see more on FDIC insurance).

Varies by type of bond.

  • Treasurys are backed by the government and considered one of the safest types.

  • Corporate bonds, on the other hand, present the risk of you losing money if companies go bankrupt.

  • *Brokerages can provide CDs as well, but only brokered CDs, which differ in some regards from standard CDs.

    CDs vs. Treasurys vs. savings bonds

    All three investment options involve a similar trade-off: You agree to lose access to money for a period of time in exchange for a predictable rate of return. However, they differ in many ways.

    What are they and where to buy: CDs are a type of FDIC-insured savings account issued by a bank and offered at banks and brokerages. Treasurys and savings bonds are investment options in which you lend the U.S. government money in exchange for interest, and both are safe because they’re backed by the full faith and credit of the U.S. government. You can buy Treasurys and savings bonds on the U.S. Treasury’s website. Treasurys can also be bought through brokerage accounts.

    What are their rates: These vary. See Treasury rates in our Treasury explainer, savings bond rates in our I bond explainer and CD rates in our list of best CD rates.

    How long do they hold money for: Treasurys have three different forms: bonds, notes and bills, which work similarly but differ in length ranging from a few weeks to 30 years. Savings bonds, however, typically earn interest monthly for 30 years. CDs have a smaller range of terms, typically from three months to five years, but more options within that range, especially for short-term CDs such as 13-month, 15-month and 18-month terms.

    When do I cash out: Holding money to maturity is a standard way to use all three investment options, but cashing out early is possible. Treasurys can be bought and sold in a secondary market, whereas savings bonds and most CDs can’t. If you want to cash out of a savings bond early, you can do so after one year for a penalty of three months of interest — or after five years for no penalty. Like savings bonds, CDs have an early-withdrawal penalty but the penalty varies by bank and can be higher. (The exception is brokered CDs, which can be bought and sold before maturity.) Learn more about cashing out savings bonds and CD early withdrawals.

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