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CDs vs. Bonds: Differences And Pros & Cons of Each

Last updated 03/19/2024 by

Ben Coleman

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Bonds and CDs are both relatively safe, long-term investment options. CDs tend to be shorter term (most with a maximum of five years), whereas bonds can have a lifetime of up to 30 years. Both offer interest rates that could make for great fixed-income investments should you use them for your retirement funds.
If you’ve got a pile of money that you’re looking to invest, and you want to ensure that your money isn’t going to vanish with a volatile market, both CDs and bonds could make solid additions to your investment portfolio. Both are a type of fixed-income investment, which guarantee a certain return on your investment once they come to maturity.
But which is better: bond or CD? This depends on several factors, including how long you want your money invested, whether you think you might need to access your funds prior to the maturity date, and whether you expect the market to improve, decline, or stay relatively stable during the life of your investment.

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Certificates of deposit

A certificate of deposit (CD) is a special type of savings account where you deposit a fixed amount of money for a predetermined period of time in exchange for a fixed annual percentage yield (APY). Essentially, you’re sacrificing ease of access to your money for the term (anywhere from a few months to a few years) for an increased return on investment.
When a CD matures, you’re given back your initial investment along with all of the interest your deposit accrued over the course of the account’s life. If you absolutely need to, you can get access to money in your CD before its maturity date, but you’ll have to pay an early withdrawal penalty.
Early withdrawal penalties differ depending on the financial institution managing your CD, but they’re typically expressed as a period of accrued interest. For example, the penalty you pay may be equal to “nine months’ interest.”
IMPORTANT! The federal government sets a minimum for these penalties, but they don’t mandate a maximum penalty. Make sure you check the fine print of your CD agreement before signing it so you know what you’re getting yourself into.

Interest earned in a CD

The interest rate you receive for your CD will depend on what institution you choose to use and the term of your CD. Rates also change daily, so it’s a good idea to keep an eye on market trends. If rates are going up, it may be worth your while to wait to invest in case you can get a better rate.
To get a better idea of the interest rates available for CDs, take a look at some of the CD accounts offered below.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Pros and cons of CDs

Before investing in CDs, or any investment vehicle for that matter, make sure you consider the benefits and risks that come with the territory.
Here is a list of the benefits and drawbacks to consider.
  • Low-risk investments. You are guaranteed to recoup your initial investment plus the money generated with the agreed-upon interest rate on the account’s maturity date. This predetermined income, along with the government’s $250,000 FDIC insurance guarantee, protects you from stock market volatility and economic disaster.
  • Higher interest rates than typical savings accounts. Because you can’t access your money as easily as you can with a savings account, you’ll get a much better interest rate than traditional savings accounts.
  • Low market adaptability. Because you determine how much money you’ll earn at the outset of investing in a CD, you lose out on the ability to capitalize on market success. If interest rates rise because markets are soaring, you can’t celebrate with other investors.
  • Early withdrawal penalty. CDs penalize you if you need to access your money making them less liquid than other investments. The whole idea of a CD is based around the bank assuming they have access to your money for a predetermined period of time. While this gets you higher interest rates, you could also receive considerable penalties.


A bond is, at its essence, an IOU agreement. When you purchase a bond, you do so with the understanding that you’ll receive predetermined interest payments for the duration of the bond’s life. Once the bond matures, you’ll receive your principal investment as well.
Similar to CDs, bonds’ interest rates are typically much higher than a standard savings account. This is because the bond issuer knows they will have a predetermined period of time to repay the money. Interest rates paid on bonds vary day-to-day, which could expose you to interest rate risk. However, they’ll also be different depending on what type of bond you purchase, and the duration of the bond’s life.
There are three main types of bonds, which differ based on the entity from which you purchase them.

1. U.S. Treasury bonds

Bonds purchased from the U.S. government are known as U.S. Treasury bonds. These are one of the safest types of investments, as they are backed by the credit of the federal government.
Treasury bonds tend to be long-term investments that mature after 30 years and pay interest every six months.

2. Municipal bonds

Municipal bonds are purchased from a state, county, city, or other municipality. They tend to be quite safe as well and can be broken down into three subcategories:
  1. General obligation bonds. These are unsecured bonds that aren’t tied to any specific assets. Instead, they are backed by the “full faith and credit” of whoever issues them. Because state and local economies are relatively stable, these can still be safe investments.
  2. Revenue bonds. These bonds are backed by revenue generated from specific projects, such as highway tolls or parking fees. Some revenue bonds are “non-recourse,” which means that if the project backing them fails to generate enough money, the bonds don’t have to be paid back.
  3. Conduit bonds. Conduit bonds are issued by municipalities on behalf of a third-party entity, such as a nonprofit college or a hospital. The third party is responsible for paying back these bonds to the issuer, who pays the interest. If the conduit borrower fails to repay the money, the issuer usually won’t have to pay back the bonds.

3. Corporate bonds

Corporate bonds are issued by companies in order to raise revenue. These can be somewhat risky because if the company fails you may not be able to recoup your initial investment.
Bond prices are determined by the market in which they’re purchased. If things are going well economically, selling bonds on the secondary market is likely to fetch you a higher price for them than you initially paid. However, if markets are struggling, bond prices decrease.

Pro Tip

You can purchase individual bonds or bond mutual funds. These groups of bonds take on a similar strategy to the index funds and exchange-traded funds (ETFs) found in the stock market.

Pros and cons of bonds

As with CDs, take some time to review the benefits and drawbacks of bonds before investing in them.
Here is a list of the benefits and drawbacks to consider.
  • Steady income stream. CDs issue a single, lump interest payment when the account matures — bonds pay interest semi-annually (usually every six months). Of course, you also recoup your initial investment at the bond maturity date.
  • Can be sold. If you realize that you need your money before your bond matures, you can sell bonds on a secondary market. You’re not necessarily guaranteed to recoup your full investment, but it’s possible that you could actually make more money than your initial investment.
  • Bond interest can be tax-exempt. The interest you earn from municipal bonds is generally exempt from federal income tax, as well as state and local taxes if you reside in the municipality that issued the bond.
  • Tend to be fairly safe investments. When the bond issuer is a municipality (or even Uncle Sam), it’s unlikely that you’ll fail to recoup your initial investment. (Corporate bonds may be less safe, depending on how well-established the company issuing them is.)
  • Not guaranteed to sell. It’s not guaranteed that you’ll be able to sell your bond on the secondary market. There needs to be enough of a market that other bond investors want to buy the bond, otherwise you can’t sell it. If the market is struggling enough, it’s possible that you could end up stuck with bonds that you don’t want.
  • May be less secure than other investments. Bonds can be less secure than CDs, depending on who issues them. Struggling companies or municipalities may sell bonds because they need to generate revenue in order to survive. If the money they raise isn’t enough to stabilize the entity, it’s possible they won’t be in a position to repay the bonds they sold when they mature.
If you think bonds may be the right investment option for you, consider speaking to one of the brokerages below, each of which handles bonds.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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CDs vs. bonds: What’s the difference?

At the very heart of things, bonds and CDs are quite similar: They are both forms of relatively safe, long-term investments. There are, however, some important distinctions between CDs and bonds that you should be aware of before deciding which to purchase.
IssuerFederal government, state or local municipality, or a corporation.A bank or a credit union.
Interest rates3% – 4.5% depending on whether you buy municipal or treasury bonds and the duration of the bond.2.5% – 4.25% depending on the duration of the CD.
Duration6 months to 30 years6 months to 5 years
Access to moneyNo access to funds prior to maturity date unless you sell the bond on the secondary market.Access to funds prior to maturity date if you pay an early access penalty.
InsuranceGuaranteed by the entity from which they are purchased.Insured by the federal government for up to $250,000

CDs vs. bonds: Which is right for me?

CDs are likely better options if you’re looking to capitalize on earned interest for a few years in order to save up for a larger purchase (like buying a home). The bank or credit union that issues the CD guarantees a certain rate of return on your investment. You also don’t have to worry about losing out on interest in a strong market over the course of a 30-year contract.
Bonds, on the other hand, may be a better choice if you want to squirrel away money for a long time down the road. The classic scenario here is being gifted with savings bonds at birth by your grandparents, which you would cash in 18 years later to attend college or 30 years later to buy your first home.

Pro Tip

When purchasing bonds, experts tend to advise that you have a diversified portfolio: You don’t want to put all your proverbial eggs in the same economic basket. Purchasing a mixture of treasury, corporate, and municipal bonds would be the best way to ensure that you maximize your earnings over time.


Are bonds better than CDs?

While this isn’t always true, there are some cases where a bond is “better” than a CD:
  • You want to invest your money for a longer duration (up to 30 years).
  • You want the flexibility to sell off your investment on a secondary market before it matures.
  • You want to support a municipality or company that you believe in.

Are bonds or CDs safer?

Technically, CDs are safer because they’re insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 if you buy them from a bank. If you purchase CDs from credit unions, the National Credit Union Administration will insure you for the same amount.
Both bonds and CDs, however, are considered relatively safe investments. It’s unlikely that the federal government will default on bonds it issued. (Corporate and municipal bonds, on the other hand, are somewhat riskier.)

How much will a $10,000 CD make in a year?

It’s difficult to give an exact number because each CD will have a different interest rate. So let’s say you purchased a one-year CD with an interest rate of 3.5%. Using this rate, a CD with a $10,000 initial investment will yield $350.

Is it a good time to buy I bonds?

I bonds are a type of bond issued by the federal government designed to protect the purchaser from inflation. I bonds do this by splitting the earned interest into two parts. One part is fixed at the date of purchase, while the other changes every six months based on the current market. In this way, you’re guaranteed a certain amount of interest returned to you while allowing for another portion of the earned interest to grow with the market.
Because bonds have such long lifespans, protecting yourself from inflation might just be a great idea, especially these days. However, it’s hard to predict the economic landscape six months from now, let alone 5, 10, or 20 years in the future. You should always consult an investment professional before making the choice to purchase any type of bond, including an I bond.

Key Takeaways

  • CDs and bonds are both relatively safe long-term investment options (though bonds are typically longer-term than CDs).
  • CDs are types of investment bank accounts, while bonds are (essentially) IOUs sold by governments or corporations.
  • Most bonds pay out interest every six months, whereas CDs pay out interest upon their maturity.
  • CDs tend to be safer but less flexible whereas bonds carry slightly more risk.
  • Before purchasing either, you should talk to an investment professional about your financial situation.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Ben Coleman

Ben Coleman is a veteran English teacher with a knack for translating complex concepts into bite-sized chunks. Having recently dug himself out of crippling credit card debt, he's passionate about providing excellent financial resources to folks who need them so they don't end up in the same position. Ben writes for SuperMoney from Rochester, NY where he lives with his wife and dogs (Yoshi and Pig).

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