CD or Bonds?

[ScrimpAndSave]

Can someone please explain to me what the difference is?

Thanks!

[LuxLiving]

Hi ScrimpAndSave,

You might want to try:

Investopedia.com - Your Source For Investing Education

and use their dictionary feature.

[jIM_Ohio]

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.

[disneysteve]

Jim, OP actually raised the question on the I bonds thread. Your answer is correct, of course, but applies to corporate bonds. US Savings bonds are different as the issuer, the US government, isn't likely to default. And if it does, we'll all have a lot more to worry about.

[ParsnipsRhubarbCelery]

Nowadays, which is more popular?

[disneysteve]

Originally Posted by ParsnipsRhubarbCelery

Nowadays, which is more popular?

I'd say neither. It really isn't a popularity issue. Because CDs and bonds have fundamental differences, they appeal to different people at different times. I have both and will probably continue to have both as part of our portfolio.

[LuxLiving]

We hold both. They each offer different benefits and risks.

[prosper]

Originally Posted by ParsnipsRhubarbCelery

Nowadays, which is more popular?

Off the top off my head, I would have to say CDs are more popular in the short term. As stated earlier, bonds are considered debt to a corporation and they have risk associated with them. CDs are considered riskless assets and they are insured. In the event a firm is liquidated, the holder of a bond will be one of the last investors on a long list of debt collectors to recieve payment, if there are funds left over. As for the long term, bonds and CDs can be somewhat interchangeable in terms of hedging a portfolio. Of course ,this is based on the firm in question, risk level, leverage, economic status, etc.

[LuxLiving]

CDs aren't riskless w/regard to inflation or deflation. Interest rates can rise and fall while you've got your money locked away. Prices on tangible goods can wobble about usually to the upside while your money is locked away. That's why laddering CDs is a nice way to handle this. But you are going to be subject to trying to reinvest the money upon maturity. Hopefully it will be in a time when interest rates on CDs are up. Sometimes they are down and you've got to find someplace to park the money! Which is some of the reasoning behind your total portfolio might be better served with only a small portion in 'liquid' CDs. Also to be considered is the time frame for needing the $$s as early withdrawal penalty rates may also apply.

We rather like CDs for some specific purposes. It has to do w/FV (future value) of money. If I know we are going to need X number of dollars on a certain date, then after checking a FV calculator we can determine how many dollars to lock away today at what interest rate to make it happen. There may be better ways to invest to make it happen, but with CDs I like the liquidity & certainty of the situation.