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jetcityimage/Getty Images August 16, 2022 Karen Bennett is a consumer banking reporter at Bankrate. She uses her finance writing background to help readers learn more about savings and checking accounts, CDs, and other financial matters. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Certificates of deposit (CDs) and bonds are both popular with savers since they’re that may pay slightly higher yields than traditional savings accounts. With both CDs and bonds, your money will often be tied up for a set period of time in exchange for a fixed rate of return. While these two types of investments have many similarities, there are several fundamental differences to be considered when determining which of the two is right for you. What are CDs
A CD is a deposit account that usually pays a fixed annual percentage yield (APY) in exchange for locking up your money for a set period of time. typically range from three months to 10 years, and longer terms often pay higher yields than shorter ones. CD yields tend to fluctuate along with the . As such, the rates paid by many CDs have been increasing since the Fed began aggressively this year. How safe are CDs
CDs are considered a safe investment since they pay a guaranteed rate — and up to $250,000 of your funds are protected from bank failure when your CD is backed by the (FDIC) or the (NCUA). One factor that can impact the fixed rates of CDs negatively, however, is inflation. Money tied up in a CD can lose purchasing power over time if the rate of inflation surpasses the interest rate. Cashing in a CD before the term expires often results in an . The longer the term of the CD, the more substantial that penalty tends to be. The fee amount is usually based on the interest the CD pays. For instance, an early withdrawal from a CD may cost you 90 or 180 days’ worth of interest. When to choose a CD
A CD with a fixed term and guaranteed rate can be a good place for money you plan to spend down the line, such as a wedding, or the purchase of a house or car. Due to early withdrawal penalties, however, the money is not as easily accessible as funds in a savings account. This makes a liquid savings account a better option for money you may need for or other purchases in the short term. What are bonds
When you invest in a bond, you’re effectively making a loan to the government or corporation that’s issuing the bond. In return, you receive interest payments over a set timeframe. Bonds are often considered a necessary since they tend to carry less risk than stocks. The tradeoff for less risk, however, is a lower expected return.s Types of bonds include Treasurys, , municipal bonds, and . Individual bonds are available for purchase, or you can choose to invest in bond mutual funds or exchange traded funds (ETFs). You can also acquire government bonds directly from the U.S. Treasury, which allows you to avoid the fees associated with buying through a broker. How safe are bonds
There are ways you can lose the money you’ve invested in bonds. If interest rates rise substantially, selling a bond before maturity might mean you won’t get the price you paid for it. Yet you’ll likely get the face value of the bond if you wait until it matures. A bond may become worthless if the issuer defaults on the payment of the bond — such as when a company that issued a bond goes bankrupt. As such, it can pay to go with investment-grade bonds, which have earned a high rating from credit-rating agencies. Bonds such as Treasurys and U.S. savings bonds, however, are backed by the full faith and credit of the U.S. government. Like CDs, bonds that pay a fixed return can be impacted negatively by , since the purchasing power of the bond’s interest payment can go down if inflation increases. An alternative to fixed-return bonds is U.S. government-issued , which help protect your investment by adjusting for inflation. The yields on these bonds rise and fall along with the rate of inflation. When to choose bonds
Investors looking to diversify their portfolio may decide to put a set percentage of their money in bonds, since they generally carry lower risk than stocks. As draws nearer, some choose to invest more heavily in bonds in hopes of receiving a steady return with little chance of losing money. CDs vs bonds
The following chart is a side-by-side comparison of CDs and bonds that shows where you can buy them, how the money is kept safe and the liquidity of the funds. CDs Bonds Issuer Banks or credit unions Governments, municipalities or corporations How funds are protected With CDs that are covered by the FDIC or NCUA, funds are insured up to $250,000 per depositor, per insured bank, for each account ownership category. Treasurys and U.S. savings bonds are backed by the federal government. Corporate bonds are backed by each issuer and carry the risk of losing principal if the company defaults. Municipal bonds are backed by the city, county, state or other municipality that issued them. While generally safe, these bonds could go into default if the issuer files bankruptcy. Liquidity Most CDs carry early withdrawal penalties, based on the interest the CD pays, such as 90 days of interest or 180 days of interest. Bonds have maturity dates, but most can be sold sooner on secondary markets. While CDs and bonds have various similarities — both are low-risk investments that often earn a fixed rate — there are several differences that can factor in when you’re choosing between the two: Safety
Generally, both CDs and bonds can be safe investments. When you open a CD that’s insured by the FDIC or the NCUA, however, you’re guaranteed not to lose the money if the bank were to fail. Treasury bonds and U.S. are backed by the federal government. While the same is not true for alternatives such as corporate bonds, you can help minimize your chances of losing money by choosing bonds that have been rated investment grade by the credit-rating agencies. Minimum investment requirements
If you don’t have a lot to invest, you may be able to find a CD that requires a low minimum balance — such as , which requires a minimum opening deposit of just $500. Other banks, such as and , require no minimum deposit to open a CD. The face value of bonds can vary based on the type of bond and when it matures. Some corporate bonds and , for instance, hold a minimum face value of $1,000 — which is what you’ll pay to buy the bond. One way to avoid paying a hefty minimum face value for a bond is investing in , which consist of a portfolio of bonds. This allows you to buy a single share in a bond fund at its trading price — and some brokers allow for the purchase of fractional shares. Liquidity
The funds in most CDs cannot be accessed before the CD matures without your being subjected to an early withdrawal penalty. While bonds also carry a maturity date, you may be able to sell them on the secondary market before that date arrives. Ultimately, funds you may need access to in the near future — such as for emergencies — may be best kept in a liquid savings account. Bottom line
Both CDs and bonds are generally safe investments, and both can help balance out a portfolio that also consists of riskier alternatives such as stocks. CDs and bonds may pay a slightly higher yield than traditional — and when choosing between the two, it’s important to consider factors including safety, minimum investment requirements and liquidity. SHARE: Karen Bennett is a consumer banking reporter at Bankrate. She uses her finance writing background to help readers learn more about savings and checking accounts, CDs, and other financial matters. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles