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Buying Bonds Vs. Certificates of Deposit (CDs)

written by: H. Rox•edited by: Laurie Patsalides•updated: 4/24/2009

The volatility of the stock market may mean you're now considering buying bonds or certificates of deposit (CDs) as investment strategies. But there are a lot of different factors to take into account as you choose between buying bonds vs. certificates of deposit.

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    If you're looking for what's considered a less risky investment than buying stocks, bonds or certificates of deposit may be a good idea. If you're not sure whether you should be buying bonds vs. certificates of deposit, here is some information that can help you decide.

    First, let's look at the choices:

    CDs are a low-risk way to save money. You put your money in, and it accumulates interest for however long the term is. In most cases, you can be penalized for early withdrawal.

    Certificates of deposit are FDIC insured. Bonds are not, but some have tax benefits you need to consider if you're buying bonds vs. certificates of deposit.

    You can buy U.S. Savings Bonds through a government website. In addition, they are considered extremely safe investments because they are backed by the U.S. government. U.S. Savings Bonds include Series EE Savings Bonds or Series I Savings Bonds. According to the government website, Series EE Bonds are bought at 50 percent of face value; so $50 buys a $100 Series EE bond.

    Municipal Bonds are offered by local governments, towns, cities, etc. One benefit of buying municipal bonds vs. certificates of deposit: is that many municipal bonds are not taxed by the federal government, making them an attractive option for investors.

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    How much interest can you make with bonds vs. CDs?

    Interest can add up with bonds and CDs.
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    There are also Zero Coupon Bonds. According to David Lerner Associates, these are also bonds that you buy at less than face value.The example David Lerner Associates gives: a bond with a face amount of $20,000, maturing in 20 years, may be purchased for roughly $6,757. The David Lerner Associates website mentions, people often use these for retirement and for putting college money aside for children.

    In conclusion, if you want to compare buying bonds vs. certificates of deposit. You can check online to compare interest rates, and you may find they're very similar.

    Before deciding if you're buying bonds vs. certificates of deposit, you should calculate the tax benefits of bonds. Depending on your tax bracket, it could be like getting extra interest. The length of time until maturity may also be a factor on buying bonds vs. certificates of deposit, depending on how soon you need the money, a shorter CD term might be better. You'll also have to take into account that the government says there are limits to the amount of Series EE and I Series Bonds you can buy each year.

    Overall, there's no easy answer to whether you should be buying bonds vs. certificates of deposit. You'll have to consider the above factors in making your choice.

    Photo Credit: H. Rox