Certificates of deposit (CDs) and bonds are similar but not identical. They are both fixed-income securitiesthat the investor holds onto until their maturity dates. The investor puts money into a CD or a bond for a set period of time, and they get their money back when the time is up.
The investor is also paid interest. Both CDs and bonds are debt-based securities, and the investor is the creditor.
It’s really no different than having a friend ask for a $10 loan today and give you an IOU promising to pay $11 next week. The $1 interest is collected for the same reason that banks charge interest on loans: to compensate you for delaying your ability to make use of the money. You can’t spend that $10 when you don’t have it.
Key Takeaways
- Certificates of deposit (CDs) and bonds are both debt-based, fixed-income securities that investors hold until their maturity dates.
- CDs are considered risk free because their deposits are insured by the Federal Deposit Insurance Corp. (FDIC).
- Bonds are relatively risky and therefore usually pay higher interest than CDs.
- CDs are relatively short-term investments, while bonds usually have longer terms.
- Banks and credit unions are the primary issuers of CDs.
Bonds vs. CDs
Bonds and CDs fit under the same broad category of investment vehicles. Here’s how they differ.
Bond Risks and Rewards
Bonds are issued by companies or governments when they want to raise funds, for their ordinary operations or for a special project.
All bonds are awarded a rating by a bond rating agency according to the likelihood that the company or government that issues the bonds will default on their debts. There is a very low default risk for investment-grade bonds and a greater risk for so-called junk bonds.
The lower the risk, the lower the interest rate that the issuer will have to offer to find takers for their bonds.
A CD Is Like a Savings Account
The issuer of a CD is usually a bank or a credit union. It is more like a savings account than a loan.
Like a savings account, money in a CD is guaranteed by the Federal Deposit Insurance Corp. (FDIC) for deposits up to $250,000. Because it is literally as safe as the U.S. Mint, the CD pays a very modest interest rate.
The rate of return is a little better than a traditional savings account because the investor has promised to keep that money on deposit for a period of time, ranging from one month to five years. The investor can get the money out early only with a penalty.
The rate of return is lower than bonds would pay. The reason is the absence of risk.
As of May 18, 2022, the average interest rate was 0.24% for a one-year CD and 0.43% for a five-year CD.
People often refer to any fixed-income security as a bond, but that is technically incorrect. Bonds generally mature after 10 or more years, while CDs and other fixed-income securities tend to have shorter maturities.
Time to Maturity
This is the sticky—but also the most significant—part. Bonds are longer-term investments, with many maturing after 10 years or more. CDs mature in as little as one month, although they may go for five or even 10 years.
There are further distinctions or categories within the world of fixed-income debt securities. The loose categorization is as follows:
- Treasury bills (T-bills) generally mature in less than one year.
- Notes generally mature in one to 10 years.
- Bonds generally mature after a decade or more.
In other words, while a bond is technically a fixed-income security with a maturity of 10 years or more, people often use the term bond to refer to fixed-income securities in general—even for those securities with a maturity of fewer than 10 years.
What are the main differences between bonds and certificates of deposit (CDs)?
Bond issuers are primarily companies or governments raising money for their operations or for special projects. Banks and credit unions are the main issuers of certificates of deposit (CDs).
A CD is similar to a savings account. It’s a place to keep your money safe until you want to do something else with it.
Can CDs lose money?
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000, per depositor, per FDIC-insured bank, per ownership category, so they can’t lose value.
Which investment vehicles mature sooner?
Bonds are generally longer-term investments, generally maturing after more than 10 years. CDs mature in as little as one month and in as many as 10 years.
The Bottom Line
The difference in time commitment for bonds and CDs is best expressed in terms of the investor’s motives. CDs are short-term, low-risk, interest-paying storage for money until a more profitable investment or a better use for the money can be found. Bonds are long-term vehicles for a guaranteed profit and, for many investors, a safer haven to offset the risks of losses in other investments such as stocks.
FAQs
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.
Are CDs a type of bond? ›
Certificates of deposit (CDs) and bonds are similar but not identical. They are both fixed-income securities that the investor holds onto until their maturity dates. The investor puts money into a CD or a bond for a set period of time, and they get their money back when the time is up.
What is a certificate of deposit classified as? ›
A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. You generally agree to keep your money in the CD without taking a withdrawal for a specified length of time. Withdrawing money early means paying a penalty fee to the bank.
Is a CD like a savings bond? ›
Both are easy, convenient ways to invest without going through a broker. Your savings will be safe and earn interest. There are differences, though, and the biggest comes down to time. U.S. savings bonds are designed to be a long-term investment, while CDs can be found with maturities as short as one month.
What is the difference between a bond and a deposit? ›
Bonds have a greater volatility than term deposits, as they are traded in liquid markets and marked to market (priced by the market) daily, whereas the term deposit rate is set by the prevailing cash rate at the time.
What is the difference between bond and CDs basis? ›
This concept can be applied to the credit derivatives market where basis represents the difference in spread between credit default swaps (CDS) and bonds for the same debt issuer and with similar, if not exactly equal, maturities. In the credit derivatives market, basis can be positive or negative.
What is CDs bond basis? ›
The pricing differential between a CDS spread. and an asset swap spread implied by bond. prices is called a bond-CDS basis.
What are the 4 main types of certificates of deposit? ›
Types of CDs
- High-yield CD.
- Jumbo CD.
- Bump-up CD.
- Add-on CD.
- No-penalty CD.
A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that's usually higher than the rate for a regular savings account. A CD also has a fixed term length and a fixed withdrawal date, known as the maturity date.
How are certificates of deposit classified on the balance sheet? ›
Certificates of deposit held for investment with an original maturity greater than three months are carried at amortized cost and reported as short-term investments on the consolidated balance sheets.
Key Takeaways. Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.
Should I buy a CD or bond? ›
The bottom line on CDs versus bond funds
While CDs offer some advantages over bond funds, it's worth considering that historical results show bond funds have outperformed in a large majority of instances after CD rates peaked and Fed rate hiking cycles ended.
Is it better to buy a CD or Treasury bond? ›
We generally suggest that if there's the possibility that you may need the money prior to maturity, consider Treasuries over CDs because they're more liquid.
Is a bank deposit a bond? ›
Certificates of deposit and bonds are two types of investments that may offer higher interest rates than a traditional savings account. However, CDs can be seen as a type of savings account, while bonds are typically grouped with investment vehicles such as stocks and mutual funds.
Are deposits bonds? ›
A deposit bond is an alternative to the traditional cash deposit paid when entering into a real estate contract. Instead of providing a lump sum in cash, a buyer obtains a deposit bond from a financial institution or an insurance company.
Is it better to be in bonds or cash? ›
Bond returns have consistently exceeded the returns of cash and cash equivalents. From 2008-2022, bonds outperformed cash by a 2.1% annual average. While 2022 was the worst-performing year in the modern history of the bond market, the year's results failed to offset the outperformance of the preceding 15 years.
Is CDs ionic or covalent? ›
Who are the experts? Experts have been vetted by Chegg as specialists in this subject. Cadmium sulfide (CdS) is an ionic compound.
Are CDs riskier than bonds? ›
For many Americans, the pull of CDs has recently been stronger than for bonds. The latter can be riskier, as many investors saw in 2022 when fixed-income portfolios experienced heightened volatility; in contrast, CDs are insured up to $250,000 by the Federal Deposit Insurance Corp.
Is it better to buy treasuries or CDs? ›
Currently, Treasuries maturing in less than a year yield about the same as a CD. Therefore, all things considered, it likely makes more sense to choose Treasuries over CDs, depending on your situation, because of the tax benefits and liquidity when considering very short-term maturities.
Are CDs compound or simple? ›
CDs usually earn compound interest, a type of interest in which the interest you earn is reinvested into the CD and earns interest of its own. One rate known as the annual percentage yield (APY) can help you understand the compound return you will receive on your investment.
