CD vs. Bond: How They’re Different and Which Is Right for You

Certificates of deposit and bonds could both be good options for people who want to earn interest on their money. But they are distinctly different financial vehicles.

CDs are interest-bearing accounts that are generally federally insured. You deposit money for a set term, and interest rates on CDs are typically fixed. Bonds are investment vehicles that can be bought and sold on a secondary market. Interest rates are fixed, but bond prices will fluctuate in the opposite direction of interest rates.

Here’s a look at how a CD vs. bond works to help you decide which is right for you.

CD vs. bond: A quick comparison

	CD	Bond
Issuer	Banks Credit unions	U.S. federal government Municipalities Companies
Interest rates	0.20%-3.00%, varies by lender	0.50%-3.99% for U.S. Treasury bonds, varies for other types of bonds
Term	Up to 5 years	Up to 30 years
Liquidity	Generally can’t be withdrawn without penalty until the maturity date	Can typically be bought and sold on the secondary market
Returns	Will pay interest at the end of the CD term	Will pay interest at regular intervals, generally every six months or every year
Who it’s best for...	Someone who wants to put money in a bank account that earns decent interest	Someone who wants to diversify their investment portfolio and potentially earn decent interest

How does a CD work?

A certificate of deposit or CD account is a savings vehicle offered by a bank, credit union, or some other type of financial institution. CDs typically require a minimum deposit and generally have a set term, which requires you to keep your money in the account for a set period of time.

Although there are some no-penalty CDs, most CDs impose an early withdrawal penalty if you withdraw money prior to the CD’s maturity date. These penalties will vary, but they often involve forfeiting some amount of the interest earned on the CD.

Most CDs opened through a bank have Federal Deposit Insurance Corporation insurance up to a set amount — generally $250,000. CDs issued through a credit union, which are known as share certificates, may be insured up to $250,000 through the National Credit Union Administration. These types of insurance help to protect your deposit in the event a bank or credit union goes under. It pays to check on insurance through any financial institution you are considering beforehand to be sure.

Types of CDs available

If you’re looking for a CD account, there are several types to consider, including:

• Traditional CDs: Traditional CDs are typically offered by banks and credit unions. In return for depositing your money for a specified term, you receive a set rate of annual interest over that term. Once the CD matures, you can take your money, or you can reinvest it in another CD if you choose.
• No-penalty CDs: These CDs are what the name implies. With these CDs, there is no penalty if you withdraw your money prior to the end of the CD term. Some offer higher rates than others, so you will want to check the interest rate and other terms to be sure this is a good option for you versus some other type of savings or money market account.
• Jumbo CDs: These are similar to traditional CDs, only they generally require a larger minimum deposit. A $100,000 minimum deposit is not uncommon. A jumbo CD will often offer a higher interest rate than a traditional CD. However, before investing this much money in a CD, it’s a good idea to ensure this vehicle offers a decent return versus other potential investment options.
• High-yield CDs: These CDs may offer higher yields than traditional CDs. You might find these types of CDs at an online bank, as they could offer higher yields because they have lower overhead than a brick-and-mortar bank.
• Brokered CDs: Brokered CDs are sold by brokerage firms. They are similar to traditional bank CDs except they can be bought or sold on the secondary market. These CDs may or may not have FDIC insurance. They could also offer greater liquidity via the ability to sell them and offer higher rates. You might lose money if you sell a brokered CD before its maturity date, though.

How does a bond work?

A bond is a debt instrument, or a tool to raise capital, issued by a corporation, the U.S. Treasury, other federal agencies, or states or municipalities. The bond issuer offers the bonds to investors who invest in them. Bonds typically have a face value — $1,000 is common, though you might see bonds with a higher or lower face value, too. Bonds are considered a fixed-income investment because they generally pay interest at regular intervals, semi-annually is common.

Because bonds are a debt instrument, they act as an alternative to borrowing from a bank for corporations. The issuer is obligated to pay back the debt via redeeming the bonds upon maturity. Defaulting on a bond can mean bankruptcy for a corporate issuer — and for a governmental body, as we saw in Detroit several years ago.

Bonds are not insured by an entity like the FDIC or NCUA, but some bonds carry insurance. Insurance is more common with municipal bonds than with a bond issued by a corporation.Treasury securities do not need insurance, as they are backed by the full faith and credit of the U.S. government.

Unlike most CDs, bonds can be bought or sold on the secondary market. In fact, this is common.

Although bonds are considered relatively safe investments, there are some risks to be aware of, including interest rate risk and default risk. Once issued, the price of a bond traded on the secondary market fluctuates with the direction of interest rates. Bond prices generally move inversely with interest rates, so when interest rates rise, bond prices typically decline.

There’s also the risk of default, which can happen if the issuer of the bond is unable to make the interest payments promised or redeem the bonds upon maturity. Bond rating agencies — like Standard and Poor’s, Fitch Ratings, and Moody’s Investors Service — rate various bonds based on the issuer’s financial strength. Bonds with a lower rating generally have to pay a higher interest rate in order to attract investors, as they are generally a higher-risk investment.

Types of bonds available

If you’re wondering how to buy bonds, there are several different types available for investors, including:

• Corporate bonds: Corporate bonds are issued by corporations to raise capital to fund their business. These bonds are rated by Standard and Poor’s, Moody’s Investors Service, and Fitch Ratings, and can be rated as investment grade or lower. Generally, the higher the rating, the greater the chances the issuer can repay its debt. Bonds rated below investment grade are often referred to as junk or high-yield bonds. These bonds generally have a higher interest rate to entice investors to purchase them.
• Municipal bonds: Municipal bonds, or munis, are issued by states, cities, counties, and other municipal agencies. Generally, interest on munis is exempt from federal income tax and can be exempt from state income taxes if the bond is issued by an entity in your state of residency. Munis are also subject to bond ratings based on the financial health of the issuer.
• U.S. Treasury securities: These securities come in a variety of types. T-Bills are short-term securities that mature in a year or less. Treasury bonds and notes generally take longer to mature. Treasurys are considered the equivalent of a risk-free asset because they’re backed by the federal government. Interest on Treasury securities is exempt from state income taxes.
• Bond funds: Bond funds and exchange-traded funds (ETFs) are a way to invest in bonds. There are actively managed mutual funds and ETFs, as well as funds that invest in bond indexes. These investments offer instant diversification among a number of bonds.

Key differences between a CD account vs. bond

CDs and bonds are two completely different options. A CD is a type of bank account, whereas a bond is an investment vehicle that can be bought or sold as an individual bond or via a bond mutual fund or ETF. They are essentially like apples and oranges.

1. Issuers

CDs are accounts offered by some of the best banks and credit unions. Bonds are issued by the ultimate borrower, whether a corporation or governmental entity. Bonds can also be purchased on the secondary market via a broker.

2. Interest rates

The interest rate on a CD is generally fixed for the term of the CD. CD rates are typically set by banks and based on various factors. Online banks might offer higher rates than traditional brick-and-mortar institutions because online banks often have lower overhead costs.

Interest rates on bonds are determined by factors like the risk of the bond issuer, the financial health of the issuer, and the term of the bond. There is generally more risk with a bond that matures in 20 years than with one that matures in two years because more things can change over time.

3. Access to your money

Although no-penalty CDs are an exception to this, if you withdraw money from a CD early, you’ll generally incur a penalty. Bonds are typically more liquid. You can sell them on the secondary market if you need the money — however, the price you receive may be more or less than what you paid for the bond.

You might choose a CD if…

A CD could be a good choice for money that you don’t need right away, but don’t want to take a big risk with. It's important to choose a CD term during which you will not need the money to avoid any potential penalties.

You could also consider creating a CD ladder, which could give you more flexibility. This involves buying several CDs that mature at different times. So instead of investing a large sum like $20,000 in a CD with a five-year term, you might invest $5,000 in a one-year CD, $5,000 in an 18-month CD, $5,000 in a three-year CD, and $5,000 in a five-year CD.

By laddering the maturity dates, you will have CDs maturing at different intervals, which can give you access to your money sooner than if you’d invested it all in a CD with a longer term. You can choose to reinvest it in a new CD or use it elsewhere.

You might choose a bond if…

Bonds are an investment vehicle as opposed to a savings account. Bonds could be a good choice if your goal is to diversify your investment portfolio.

A bond with an attractive interest rate could provide solid, ongoing income. Ideally, if the rate is decent, you would hold the bond until maturity. But it's good to know you have the option to sell if needed or if market conditions have increased the bond’s price considerably.

FAQs

Bottom line

Both CDs and bonds could be a solid choice for someone looking to earn interest. But the right choice will depend on your situation.

If you’re thinking about depositing money into a CD, check out our picks for the best CD accounts.