CDs
Money is insured- if bank goes under, you will still get money back. In addition, a CD guarantees return of principal and pays you a fixed amount of interest, usually paid at maturity.
Bonds-
Bonds are a loan. The loan is set up such that the money you put into the bond is what is loaned to someone/something else. That entity pays you back interest.
There are more risks with bonds. The principal invested is at risk for two reasons. 1 reason is the bond issuer might default (think Enron or Worldcom)- meaning the company cannot keep the promise to repay the principal. 2nd reason is if interest rates change, the value of bond will move other way (rates go up=bond value goes down, rates go down, bond value goes up). If you hold bonds to maturity (time) that 2nd risk is eliminated.
The bond will pay you back interest, and at end of term for bond, also return your principal.
Long term return of CDs will be between 2 and 4%. Long term return of bonds is between 4 and 7%. The higher return for bonds is because of the additional risks.
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