Certificates of Deposit vs. Bonds

Introduction

If you want to earn interest on your money with less risk than stocks, two popular options are certificates of deposit and bonds. They work in similar ways, but there are important differences.

What Is a CD?

A certificate of deposit, or CD, is a savings product offered by banks. You agree to leave your money in the CD for a set time, such as six months or five years, and the bank pays a fixed interest rate. CDs at FDIC-insured banks are protected up to $250,000. If you withdraw early, you usually pay a penalty.

What Is a Bond?

A bond is a loan you make to a government or company. The issuer pays you interest and returns your money when the bond matures. Bonds can be bought and sold before maturity, but their price can rise or fall depending on interest rates and the issuer's creditworthiness.

Comparing the Two

CDs are simple and very safe, making them great for short-term goals. Bonds offer more variety and sometimes higher yields, especially corporate bonds, but they come with more risk. Treasury bonds are backed by the U.S. government and have tax advantages, since interest is exempt from state income taxes. Bonds can also be held through funds, which offer diversification.

Conclusion

CDs and bonds are both great tools for earning steady income with less risk. Knowing how they differ helps you choose the right one for your goals!