CDs vs. Bonds: What's the Difference? - NerdWallet (2024)

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?

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).

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.

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.

Compare at a glance

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.

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.