Certificate of deposits (CDs) vs. bonds: How do they compare? (2024)

If you’re looking for a secure investment with decent returns, both certificates of deposit (CDs) and bonds may be worthy of consideration.

CDs are an excellent place to park your cash and earn interest on your balance. Although there’s a risk of inflation outpacing CD interest rates, they are virtually guaranteed earnings.

Bonds, on the other hand, may deliver higher returns and regular income via interest payments. While bonds can offer more liquidity, there’s a risk of default from the issuer and values fluctuate inversely to interest rates because when interest rates increase, new bonds are issued with the higher rate which makes existing bonds less attractive.

Here’s a closer inspection of the difference between CDs vs. bonds so you can get a better idea of which investment option is right for you.

Overview of CDs

A certificate of deposit is an account you deposit money into and can’t touch for a set amount of time. During that period, your money earns interest on its balance.

If you access the money before the time period ends, referred to as maturity of the account, you will likely pay penalties. Once the maturity date arrives, you can withdraw your money or roll it into a new CD.

CDs don’t allow much flexibility because you generally can’t access the money without penalty during the term. However, there is a common strategy called CD laddering, which helps create liquidity with certificates of deposits. With a CD ladder, you buy multiple CDs with varying durations, so they have a consistent schedule of accounts maturing at different times.

Pros and cons of CDs

There are many pros and cons of using a CD to grow your savings. Here are some benefits:

  • Interest rates: CDs often offer higher rates than other savings options. For example, the national average interest rate for savings accounts is 0.45%, while the average for a 12-month CD is 1.76% (as of September 2023).
  • Safety: Most banks and credit unions are insured by the FDIC or NCUA, meaning your CDs are safe up to $250,000. They are considered low-risk investments.
  • Reliable: Returns on CDs are virtually guaranteed. You can usually approximate how much money you will have by the end of the CD’s term.

While there are many benefits to CDs, they also have some drawbacks, including:

  • Limited accessibility: After depositing your money in a CD, you typically cannot access the funds without penalty until maturity.
  • Penalties: If you need to take money out of the CD early, you’ll likely have to return some of the interest you have earned.
  • Inflation: CD interest rates may not outpace inflation, lowering your money’s purchasing power. You can reduce this risk by investing in shorter-term CDs.
  • Lower returns: Although CDs are lower risk, you may see smaller returns than you would with stocks or mutual funds.

Overview of bonds

A bond is essentially an IOU. The issuer, often a corporation or government, issues bonds for investors to purchase.

To entice investors to purchase the bonds, the issuer promises to pay interest until the bond matures and the principal returns to the investor.

Businesses often use the money raised from the bonds to buy property, refinance debts, sustain operations or hire more employees. Governments may use it to improve infrastructure, fix roads or fund schools.

There are many different types of bonds and term durations. They typically have a fixed interest rate paid semiannually (every six months).

Pros and cons of bonds

Bonds are a relatively safe way to earn regular investment income and diversify your portfolio. Here are some benefits:

  • Fixed income: One of the best aspects of bonds is that you receive regular income from interest payments, usually every six months.
  • Potential profit: You may be able to resell bonds for a premium on the secondary market.
  • Safety: Bonds are generally considered safe investments. They tend to be less volatile than stocks. Bond investors can recover some of their money if the company goes bankrupt because they will have a claim on the company’s assets and cash flows, though the bond’s terms determine the priority of the claim.

Although there are upsides to investing in bonds, there are also some downsides:

  • Lower returns than stocks: Stocks have a higher risk, but you may also see greater returns with stocks than bonds.
  • Interest rate risk: If the Fed raises interest rates higher than your bond’s interest rate, its market value will fall.
  • Risk of default: There’s a risk of the issuer defaulting on the bond. Some bonds, like high-yield bonds, are more risky but offer higher interest rates. However, there are safer options, like bonds from the government and reputable corporations, for risk-averse investors.

When to consider CDs

CDs may be an appealing option if you’re looking for a safe investment with guaranteed rates and you don’t expect to need early access to your funds. If interest rates are high, you may want to lock in those returns by investing in a CD.

But locking in rates also means locking up your cash. Withdrawing your money early will typically come with a penalty. If an emergency arises and you have to cash out the CD early, you’ll likely lose some of the interest you’ve accrued.

This lack of liquidity is why it’s essential to establish an emergency fund before opening a CD. You could also open a liquid CD (typically with a lower interest rate) to avoid penalties if you withdraw early.

However, if you’re confident you won’t need the funds until maturity, a CD may offer a better rate than other types of savings accounts.

When to consider bonds

Bonds are attractive investments because they pay interest in regular installments. The fixed interest payments make them an excellent option for those seeking a predictable passive income source.

Like CDs, bonds are ideal if you won’t need the money before maturity. To access your funds early, you would have to sell the bond on the secondary market. Although you may be able to sell for a profit, a bond can also lose value. However, you won’t need to worry about the secondary market value if you plan to hold the bond to maturity.

While there’s a chance that the issuer could default, bonds are still considered relatively safe investments. Even if the issuer goes bankrupt, bondholders often have some claim to its assets and cash flow.

Compare at a glance



Banks or credit unions (brokerages also offer brokered CDs).

Depends on the type of bond:

  • issues U.S. Treasurys.
  • Companies issue corporate bonds.
  • State or local governments issue municipal bonds.

Return rates

CDs typically earn higher rates than other types of savings accounts.

Bonds may earn higher rates than regular savings accounts but lower returns than stocks.

Term length

3 months to 5 years

1 year to 30 years


When held at federally insured financial institutions, CDs have up to $250,000 in FDIC or NCUA insurance. However, inflation may outpace CD interest rates.

It depends on the type of bond. The government backs Treasurys, making them relatively safe. However, there’s a risk of the issuer going bankrupt with corporate bonds.

Interest payments

Usually paid at the end of the term (best for maximizing returns with compounding).

Paid periodically until the bond matures.

Penalties for accessing funds early

There’s typically a penalty for withdrawing funds early unless it’s a no-penalty CD.

If you sell your bond before maturity, it could lose value on the secondary market.

Diversifying your portfolio with CDs and bonds

“Certificates of deposits and bonds are commonly regarded as conservative investment options,” said Hazel Secco, CFP, CDFA, president and founder of Align Financial Solutions, a financial advisory company.

“CDs … are considered highly secure due to their protection of the principal investment. However, it’s worth noting that CDs may not be the ideal choice for long-term investments, as they expose investors to interest rate risk upon maturity.”

If inflation rates outpace your CD’s interest rates during its term, your money may have less purchasing power at maturity than when you deposited it.

“On the other hand,” explained Secco, “bonds can … fluctuate based on prevailing interest rates, as they share an inverse relationship.”

When interest rates increase, the value of bonds with fixed rates falls, according to the SEC.

“Nevertheless, bonds can play a pivotal role in diversified portfolios designed for long-term investment objectives,” said Secco. “Their dependable income, generated through coupon payments, can be particularly beneficial for income-focused portfolios during wealth distribution phases.”

Investors should ideally diversify their portfolios with both CDs and bonds to reduce risk and maximize returns.

What to consider when choosing CDs or bonds

There are a few factors to contemplate when selecting CDs vs. bonds:

Investment timeline

Start by considering how long you want your money to stay invested.

CD terms range anywhere from one month to five years, or longer. They may be better short-term investments due to a lack of liquidity and inflation risk.

Bonds are considered longer-term investments. They can extend anywhere from one to 30 years.

Risk tolerance

You should also consider your risk tolerance. While both CDs and bonds are generally safe investments, both carry their own risk factors.

CDs face inflation risk, while bonds face interest rate risk. Investing in a mixture of both can help hedge your investments.

You may see greater returns with high-yield bonds if you’re more risk-tolerant. These bonds are from less financially stable businesses, so they pay higher interest rates.

Financial goals

“It’s essential to have a clear understanding of your financial goals before deciding which of these investment vehicles aligns best with your needs,” said Secco.

Bonds offer a fixed, predictable income from interest. They are also more liquid and may see greater returns than CDs.

However, if you’re looking for a highly secure and easy way to earn interest, CDs may be more suitable to your goals.

Which is right for you?

After weighing your timeline, tolerance to risk and goals, you’ll likely know whether CDs or bonds are right for you.

CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.

Bonds are also more liquid than CDs because you can buy or sell them on the secondary market—although some bonds may be harder to sell than others. They may also require a larger investment since bonds are often issued in $1,000 increments.

Ideally, you would invest in both CDs and bonds to diversify your portfolio. It may help maximize your returns and distribute risk among your investments.

Frequently asked questions (FAQs)

CDs are protected up to $250,000 by FDIC-insured banks or NCUA-insured credit unions. Bonds are not insured by the FDIC or NCUA, but investors can recover some of their money if the company goes bankrupt because they’ll have a claim on the company’s assets and cash flows. However, the bond’s terms determine the priority of the claim.

Term length, deposit amount and the federal fund rate can all affect CD interest rates. Once you purchase a CD, the interest rate is locked in as long as you leave your money in the account for the specified term.

The federal fund rate, credit ratings and market activity may affect bond interest rates; however, bonds typically have a fixed rate after purchase.

Types of CDs include traditional, no-penalty, jumbo, bump-up, step-up, brokered and IRA. Types of bonds include government, municipal, international and emerging markets, corporate and agency bonds.

The interest you earn from CDs and bonds will typically be subject to federal income tax. A CD is subject to federal and state taxes, whereas treasury bonds are only taxed federally. Municipal bonds are usually not federally taxed.

Diversifying your investments is a smart strategy to minimize risk and maximize returns. Investing in a mixture of CDs and bonds can help you hedge against inflation and interest rate changes.

Certificate of deposits (CDs) vs. bonds: How do they compare? (2024)


Certificate of deposits (CDs) vs. bonds: How do they compare? ›

Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income. Bonds are also more liquid than CDs because you can buy or sell them on the secondary market—although some bonds may be harder to sell than others.

How do bonds compare to CDs? ›

Interest Rates and Returns: Bonds often have higher interest rates than CDs. Liquidity and Access to Funds: CDs typically incur penalties for early withdrawals, while bonds can be sold before maturity without penalty; however, you may incur a loss if the price of the bond is below the purchase price.

What does a certificate of deposit CD usually have group of answer choices? ›

A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.

Why would a CD or bond offer more interest than a savings account? ›

Usually, the longer the term, the more interest you'll earn since you won't have access to your money for a longer period of time. This means that CD accounts potentially allow you to earn even more interest than a high-yield savings account would.

What are two major negatives of a certificate of deposit CD )? ›

Cons of Using a Certificate of Deposit for Savings
  • Accessibility. With a savings account or money market account, you're allowed to make a certain number of withdrawals of cash or transfer funds to a linked checking account. ...
  • Early Withdrawal Penalties. ...
  • Interest Rate Risk. ...
  • Inflation Risk. ...
  • Lower Returns.
Mar 21, 2024

Are CD rates better than bonds? ›

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.

Why buy Treasury bonds over 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.

What do certificates of deposit or CDs have __________________? ›

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.

What are the pros and cons of certificates of deposit? ›

CDs offer higher interest rates than traditional savings accounts, guaranteed returns and a safe place to keep your money. But it can be costly to withdraw funds early, and CDs have less long-term earning potential than certain other investments.

What are the advantages of a certificate of deposit? ›

The pros of CDs
  • A fixed interest rate. When you open a CD, you decide exactly how much you want to invest and how long to invest. ...
  • Higher returns. Those average rates are typically higher than you'll receive in a traditional savings account. ...
  • Predictable returns. ...
  • Interest options. ...
  • Ladder options. ...
  • Security.

Why do small investors like CDs? ›

CDs are appealing for many reasons: they're relatively safe investments, offer stellar APYs, and come in a variety of different term lengths.

What is safer, CDs or Treasuries? ›

CDs and Treasurys are both safe, relatively riskless investments. Since CDs are considered deposit accounts, they're covered by Federal Deposit Insurance Corp. (FDIC) insurance, up to $250,000 per depositor, per bank. You can check if a bank is FDIC-insured on the BankFind Suite website.

Why do CDs certificates of deposit offer the highest interest rates for savers? ›

Offered by both banks and credit unions, CDs differ from standard savings accounts in that CD funds must remain untouched for the entirety of their term—or you'll incur a penalty. CDs usually pay a higher interest rate than savings accounts as an incentive for giving up your withdrawal flexibility.

Are CDs safe if the market crashes? ›

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

Are CD safe if a bank fails? ›

The FDIC Covers CDs in the Event of Bank Failure

But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.

Why is my CD losing money? ›

Inflation erodes the purchasing power of your money over time, and if your CD's interest rate isn't keeping up with inflation, you're essentially losing money. For example, if your CD earns a 2% annualized return but inflation is running at 3%, you're actually losing 1% of your purchasing power every year.

Which is safer, a bond or a CD? ›

If you're looking for safety and predictability with your investments, CDs and bonds can offer both. However, CDs may ultimately be better for those who prefer the comfort of an insured investment.

Is now a good time to buy bonds? ›

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

Are bond funds a good buy right now? ›

High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.

Top Articles
Latest Posts
Article information

Author: Pres. Carey Rath

Last Updated:

Views: 6224

Rating: 4 / 5 (41 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Pres. Carey Rath

Birthday: 1997-03-06

Address: 14955 Ledner Trail, East Rodrickfort, NE 85127-8369

Phone: +18682428114917

Job: National Technology Representative

Hobby: Sand art, Drama, Web surfing, Cycling, Brazilian jiu-jitsu, Leather crafting, Creative writing

Introduction: My name is Pres. Carey Rath, I am a faithful, funny, vast, joyous, lively, brave, glamorous person who loves writing and wants to share my knowledge and understanding with you.