Bonds vs. CD Investing

If you're looking for a low-risk investment, either bonds or CDs might be the right way to go. Both are suitable for investors looking for a way to generate long-term savings with minimal volatility. Although some overlap exists between the two, investors should be aware of some significant differences before making a final decision.

General Benefits

Bonds and CDs are common investment vehicles. Unlike stocks, which give an investor partial ownership of a company, the purpose of bonds and CDs is to generate a fixed return profit by investing money for a relatively long period of time. For this reason, both financial options are best for long-term investments. Early withdrawal from a bond or from a CD can result in penalty fees. You will also lose some of the interest that you would have earned at full maturity. For example, if you cash in a 36-month bond at 33 months, you will lose three months of interest.

CD Features

CDs are similar to savings accounts, but they have a higher interest rate and usually require a higher initial deposit. Interest rates may be fixed or variable, and the life of a CD varies from case to case. For an even higher rate of return, you can ladder the CDs. For example, you might have a five-year CD, as well as a 10- and 15-year CD, to ensure that you receive returns at regular intervals. This technique also staggers the interest rates, making it more likely that you'll cash out a CD when interest rates are high.

Bond Features

Savings bonds are different from CDs in several respects. Whereas CDs are similar to savings accounts, bonds are a bit like temporary loans that an investor makes to a bond-issuing entity, which may be a government agency or corporation. The issuer of the bond agrees to pay a certain interest rate on the amount invested at a certain maturity date. Although long-term bonds are common, you can also invest in short-term bonds, and the maturity can be anywhere from one to 30 years or even more. Like CDs, bonds can also be laddered to create consistent returns.

Considerations

If you have a lot of money to invest and don't need to access it for at least 10 years, bonds are secure and guarantee a return on investment. If your investment is $250,000 or less and you need to access it sooner, a CD may offer higher returns, although there's a bit more risk. Regardless of the strategy you choose, familiarize yourself with all the details of your investment and discuss any questions with a financial professional.