Which is better: CDs vs. Bonds

Certificates of Deposits and having bonds are two most common investments that investors constantly lookout for, and at the same time, they need to be sure that their investments are safe and serve as reasonable income. Presently, CDs offer a much higher yield than bonds, and both share the same terms and conditions in terms of safety.

However, a closer look may help investors determine which would be the ideal one for their investment, depending on their needs. In order to decide which is better, some facts worth considering include the following:

Comparing Safety Issues

The surprising news for most investors in recent times is that, some bonds do yield more than 10%. However, the average interest on CCC-rated binds at present is as high as 11.3%. At the same time, it is almost impossible to find 5-year CD the US bank or certified credit union that may issue as much as or even higher than 3%. Nonetheless, it is important to mention that the risk factor associated with CDs and CCC-rated bonds are not at the same level.

In simpler words, a CCC rating means that the investment is highly speculative and there is a high risk that there may be no interest payment or a principle investment involved. That means that there is significant risk that the investor may not get some or in fact all of the investment he or she made in the bond.

It is also important to mention that the NCUA and FDIC insured CDs are also at the other end of the risk spectrum. In the worst-case scenario, even if the bank that issued the CDs files for bankruptcy, the government insures the funds of worth $250,000 per depositor, for each financial institute. CDs always have government guarantee to protect the owner against loss of money.

Therefore, one should compare CDs against government bonds, not CCC-rated bonds.

Other Factors for Effective Comparison

• Interest on Treasuries: These are not subject to local taxes or the state.
• Selling Treasuries is Permissible: While one may be able to sell treasuries, there could be penalties on selling CDs

Although treasures have more advantages, they depend on the location. Besides, there may be federal taxes on treasuries. Another advantage of treasuries over CDs is that investors can liquefy their treasuries into cash. This may be less expensive than converting CDs to cash before they reach maturity. The penalty of liquefying CDs may involve foregoing as much as three months of interest.

Therefore, the choice about which is better and which works best, is up to investors.