CDs vs. Bonds: What’s the Difference?
Quick Answer
Both CDs and bonds let you save and grow your money, but there are some important differences to know about. Learn how CDs and bonds work, the pros and cons of each, and how to choose the right method to achieve your financial goals.
Certificates of deposit (CDs) and bonds both offer low-risk ways to earn interest on your savings, but they differ in important ways. The main difference between a CD and a bond is that a CD is a deposit account, and a bond is an investment in which you loan money to the bond issuer.
| Feature | CDs | Bonds |
|---|---|---|
| Issuer | Banks, credit unions, brokerages | Governments, municipalities, businesses |
| Typical term | 1 month to 10 years | 1 to 30 years |
| Rate of return | Varies | Varies |
| Early withdrawal penalties | Typically a percentage of earned interest | May forfeit interest and part of initial investment if you sell bond before maturity |
| Insurance | Up to $250,000 for CDs from FDIC- and NCUA-guaranteed financial institutions | Treasury bonds are backed by U.S. government; other bonds involve risk |
What Is a CD?
A CD is a deposit account you can use to save money for a certain period, or term, which may range from one month to 10 years. When the term ends, the CD matures, and you can either withdraw your initial deposit (plus interest) or roll the balance over into a new CD.
CDs are available from traditional banks, online banks and credit unions and typically feature a higher annual percentage yield (APY) than standard savings accounts. As of May 2025, a 12-month CD's average APY was 1.75%, compared to just 0.42% for a traditional savings account, according to Federal Deposit Insurance Corp. (FDIC) data. You can also find high-yield CDs with APYs over 4%.
The tradeoff: Money in a CD isn't easily accessible. Taking money out of your CD before the maturity date triggers an early withdrawal penalty, typically a certain number of months of earned interest.
Pros and Cons of CDs
Before buying a CD, consider the pros and cons.
Pros
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Federally insured: CDs from banks insured by the FDIC or credit unions insured by the National Credit Union Administration (NCUA) are federally guaranteed for up to $250,000 per financial institution, account type and account holder. You won't lose your money even if the bank or credit union fails.
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Safe investment: Federally insured CDs offer a low-risk way to grow your money. They can complement your investments in stocks and bonds, helping to diversify your financial portfolio and guard against inflation.
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Guaranteed earnings: Most CDs have fixed interest rates. If you leave your money in the CD until it matures, you know exactly what you'll earn at the end of the term.
Cons
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Potential penalties: Tapping your CD before it matures will cost you some of your earned interest. If you want the ability to access money anytime without penalty, a high-yield savings account or money market account can be a better fit.
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Modest earnings: Although guaranteed, a CD's rate of return is relatively low. Riskier investment options, such as stocks, typically earn more long term.
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Minimum deposit may be required: It's possible to find no-minimum CDs, but most CDs require a minimum deposit ranging from $500 to $100,000. You can usually open a traditional savings account with little or no money.
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Restricted access to money: Early withdrawal penalties make CDs a poor place to put your emergency fund or other savings you may need unexpectedly. CDs work better for short-term savings goals, such as saving for a wedding, vacation or home down payment.
Learn more: How to Open a CD
What Is a Bond?
Bonds are loans made to governments and businesses to pay for projects such as construction. When you buy a bond, you lend your money to the bond issuer for a certain term, usually one to 30 years. During the term, you receive interest payments, typically twice a year. When the term ends, the bond matures, and you get back the amount you paid for it (known as the face value or par value).
There are three main types of bonds:
- Treasury bonds, issued by the federal government, which include savings bonds
- Municipal bonds, issued by municipalities
- Corporate bonds, issued by businesses
Bonds are available from brokers and sometimes from the government institution that issues them. For example, you can buy savings bonds online at TreasuryDirect.gov. There are bonds with a par value as low as $100, but in general, par value starts at $1,000.
You can sell or trade bonds just as you would stocks. (Savings bonds are the exception.) But selling a bond before the term ends will cost you any interest you would have earned from holding it to maturity. In addition, if the bond's par value has declined since you purchased it, you won't get all of your initial investment back.
Suppose you buy a 10-year, $2,000 bond with a 3% interest rate. For 10 years, you'd receive interest payments of $30 twice a year. At maturity, you'll have earned $600 in interest and will get your $1,000 back as well.
Learn more: How to Buy Bonds
Pros and Cons of Bonds
Before purchasing bonds, be sure to evaluate their upsides and downsides.
Pros
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Low-risk investment: Bonds are typically safe investments. Treasury bonds are backed by the full faith and credit of the federal government. Although municipalities or corporate issuers sometimes default on bonds, it doesn't happen often.
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Source of predictable income: A bond's interest payments provide reliable income, which is valuable in retirement. As people get closer to retirement age, they often move more of their investment portfolio to bonds.
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Diversify your investments: Regardless of your age, it's a good rule of thumb to have stocks, bonds and cash in your portfolio. Making bonds part of your asset allocation mix helps balance out riskier investments, such as stocks, protecting you from market turbulence.
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May offer tax benefits: Treasury bonds and some municipal bonds aren't subject to state taxes; municipal bonds typically aren't subject to federal taxes.
Cons
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Relatively low rate of return: Investments such as stocks and real estate generally provide higher rates of return than bonds.
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Potential risk: There's an element of risk in every investment, including bonds. Typically, government bonds are safer than corporate bonds. You can check ratings of bond issuers by Fitch Group, Moody's and S&P Global Ratings. The higher the rating, the lower the risk the issuer will default on the bond.
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Some require large initial investment: Bonds may require investments of $5,000 or more, which could eliminate some bonds as options.
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Lack of liquidity: If you need money from a bond before it matures, you'll have to sell the bond and forfeit any future interest income. You could also lose money on the sale if the bond's face value has dropped since you bought it.
When to Open a CD
It can make sense to buy a CD when:
- Interest rates are high. You'll lock in high interest rates for the term of the CD. Use a savings calculator to see what CDs with different interest rates and terms can earn.
- You're saving for a short-term goal. Bonds typically have terms of one to 30 years; CDs are available in as little as one-month increments.
- You want protection for your money. Unlike bonds, CDs are often federally insured.
- You prefer a simpler savings vehicle. Choosing and managing CDs is generally easier than selecting bonds, which can be complex.
Learn more: Best CD Rates
When to Buy Bonds
Buying bonds may be a good idea when:
- Interest rates are high. Bond prices typically drop as interest rates rise, so your money will go further.
- You want to generate consistent income. Predictable interest payments from bonds can supplement your income or be reinvested.
- You're seeking tax benefits. Enjoy a tax shelter by purchasing bonds that aren't subject to federal or state income taxes.
- You're looking to diversify your portfolio. Bonds can balance out riskier investments such as stocks.
The Bottom Line
CDs and bonds both offer low-risk ways to earn interest on your savings, but they aren't ideal for everyone. If you need quick access to your money, high-yield savings accounts let you withdraw funds anytime while earning APYs similar to CDs or bonds.
Just like building your savings, maintaining a good credit score is key to your financial health. You can sign up for free credit monitoring from Experian to keep an eye on your credit and receive alerts of important changes.
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About the author
Karen Axelton
Karen Axelton specializes in writing about business and entrepreneurship. She has created content for companies including American Express, Bank of America, MetLife, Amazon, Cox Media, Intel, Intuit, Microsoft and Xerox.
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