Have you ever asked yourself which one is better for you: Bonds vs CDs? Find out more about each of them and their differences to decide!

To make a decision between Bonds vs. CDs, first you need to understand what each of them are. Although both offer a haven for your cash, they have distinct characteristics that cater to different financial goals and risk tolerances.

Let’s delve into their pros vs cons to help you decide which one is the best option for you and your needs. Also, if you want to check out more financial tips on our website, you can click on this link!

What is a CD?

A CD (Certificate of Deposit) is like a special savings account you open at a bank or credit union. You put money into it for a certain period, ranging from 1 month to 10 years. When this time is up, also known as the end of the term, the CD matures – by earning interest -, and you have two options: take out the money you put in plus the interest earned, or leave it in for another term. The downside? If you take money out before the term is up, you’ll have to pay a penalty, usually a few months’ worth of interest.

Keep in mind that, this type of account often give you more interest than regular savings accounts – some even offer over 4% interest. For example, as of June 20, 2023, a 12-month CD earned an average of 1.63% interest, while a regular savings account only earned 0.42%.

Pros and Cons of CDs

Pros:

• Safety: FDIC insurance protects your principal up to a designated limit, making CDs a low-risk investment;
• Guaranteed Returns: you lock in a fixed interest rate for the entire term, shielding yourself from market volatility;
• Predictability: CDs offer a clear picture of your future earnings, making them ideal for short-term savings goals.

Cons:

• Low Interest Rates: compared to bonds and other investments, CDs typically offer lower returns;
• Limited Liquidity: early withdrawal penalties can eat into your earnings if you need to access your money before the term ends;
• Limited Interest Rate: if interest rates rise during your CD term, you’ll be locked into a lower rate.

What is a Bond?

A bond is a loan that you give to governments or businesses. When buying a bond, you are basically “lending” them money for a certain period, usually from 1 to 30 years. In return, they pay you interest regularly, usually twice a year. When the term ends, the bond matures and you get back the amount you originally invested, which is called the face value or par value. You can sell or trade a bond, similar to stocks. However, if you sell before it matures, you’ll miss out on the interest you would have earned. And, besides that, you might not get back the full amount you originally invested if the bond’s value has droped.

Pros and Cons of Bonds

Pros:

• Regular Income: bonds provide a steady income stream, once they pay you interest regularly, usually twice a year;
• Diversification To Your Investment Portfolio: adding bonds to your investment mix can balance out riskier assets like stocks, providing stability during market fluctuations;
• Liquidity: many bonds can be traded on the secondary market, providing you with access to your cash before maturity (though at a potentially lower price).

Cons:

• Lower Returns: bonds generally offer lower returns compared to investments like stocks and real estate;
• Not Risk-Free: while bonds are relatively safe, there’s still some level of risk involved;
• Liquidity: if the bond’s value has decreased since purchase and you need to sell it, you’ll incur losses.

Bonds vs. CDs: What’s the Difference?

• Issuer: CDs are issued by banks and credit unions, and their safety is insured by the FDIC up to a certain limit. Bonds, on the other hand, are issued by governments and corporations. Government bonds are generally considered safer, while corporate bonds carry varying degrees of risk depending on the issuer’s creditworthiness;
• Liquidity: CDs are typically illiquid investments. Once you lock your money into a CD, you can’t access it without incurring an early withdrawal penalty. Bonds, on the other hand, can be traded on the secondary market before their maturity date. This provides greater flexibility but also exposes you to potential market fluctuations;
• Interest Rates: generally, bonds offer higher interest rates compared to CDs, especially longer-term bonds. This is because bonds carry more risk than FDIC-insured CDs.

Bonds vs. CDs: Which One Should I Choose?