Differences Between a Certificate of Deposit and a Bond
At first glance, a certificate of deposit and a bond may look to be the same financial tool. There are many similarities between a certificate of deposit and a fixed-income securities bond; with the most obvious being that they are both fixed-income securities that you hold on to and do nothing more with until they reach their scheduled date of maturity. You know before you invest your money into a certificate of deposit or a bond how much money you are going to be getting back when the specific period of time has ended, giving you a low-risk option to earn interest.
You earn interest on both a bond and a certificate of deposit in exchange for agreeing to keep your money locked into the investment and basically inaccessible for a set period of time – so you are a bit like your own creditor when investing in a certificate of deposit or a bond. The money you tie up in either resource is money you can't use today; and therefore you are paying yourself interest for the delayed gratification!
Both certificates of deposit and bonds are considered risk-free investments. Money in certificates of deposit is FDIC insured up to $100,000 per certificate (if investing more than that, it's a good idea to get multiple certificates of deposit to insure all of your money). Bonds are not FDIC insured but are considered extremely low risk.
While there are several similarities between certificates of deposit and bonds, there are also some vast differences which categorizes them differently:
Issuers of Certificates of Deposit and Bonds:
A bond is usually purchased from a company that is looking to raise money to fund their operations, buy a new company or establish new products and/or services. Investing in these bonds have a low default risk, but it is possible if the company goes bankrupt or out of business.
A certificate of deposit is almost always obtained through a bank, and offer a safe place to store your money until you're ready to invest it or use it somewhere else. Return rates on certificates of deposit are lower than bonds usually, but higher than a traditional savings account.
Time Period to Maturity for Certificates of Deposit and Bonds
Fixed-income security bonds are long term investments and almost always require ten years or more to reach maturity. They are considered a long-term savings method, with an almost-guaranteed profit and are often used as part of an investment portfolio to offset higher risk, higher yield investments (like equities). It's important to note that there are other investments that are often referred to as “bonds”, but that are not fixed-income security bonds.
A certificate of deposit could have varying maturity dates, from as little as a month or two up until five years. It is up to the investor of a certificate of deposit to choose the length of time they will save in the CD. They are generally considered a short-term, interest paying, low-risk investment that is used while the investor is considering other options to earn a higher return on his or her money.