Saving Bonds vs. CDs

Savings bonds and certificates of deposit have several similarities, but they also have a number of differences, as well. Where these two investment vehicles are mostly the same, it is important to understand their unique qualities before making any investment. We’ll explore several components of each investment, starting with issuers, and ending with the security of your investment in each financial product.

Savings Bonds vs. CDs – The Basics
The most basic dividing line between savings bonds and certificates of deposit is who you’re loaning your money to. Savings bonds, as you probably know, are investments where an individual is lending money to the US Federal government. Certificates of deposit, on the other hand, are debt instruments that center around the banking system—each certificate of deposit purchase is credited to a bank, which invests the money on your behalf.

Savings bonds are very simple in that they are the easiest way for an individual investor to invest in the United States government. They can be purchased online through the US Treasury website or, just like certificates of deposit, they can be purchased at your local banking institution. Likewise, both certificates of deposit and savings bonds can be cashed at a local bank—the certificate of deposit, however, must be cashed at the bank where it was purchased.

Maturity Dates
While the topic of savings bonds vs. certificates of deposit shows little differences in who you loan your money to, or where they can be cashed, the length of time that each investment must be held varies greatly. Certificates of deposit, for example, are often sold with maturity dates no longer than 5 years, with most being sold in one, six, and twelve month terms, followed by an additional certificate deposit at each one-year mark up to five years.

Savings bonds, on the other hand, are intended to be held for a much longer period of time. The Series EE bond–the most common savings bond–is purchased for a period of 20 years, and have an “interest-bearing life” of 30 years. For the first 20 years, investors receive an annual return equal to the return promised at the time of purchase; however, for the next 10 years, the interest rate is variable, as the bond has matured and to lock in the rate would require another purchase.

Savings bonds do not have to be held to maturity, contrary to popular belief. Instead, savings bonds can be held for any period of greater than five years before redemption without penalty. If cash is needed immediately, then the bonds can be cashed in within the first five years with a penalty on the early redemption. This penalty is equal to the last three months of interest, which at present really isn’t that large of an amount.

Certificates of deposit can be cashed at any time, though they often charge a penalty of 10% for early withdrawal. However, once a certificate of deposit reaches maturity, then the principle is available at any time without a penalty.

Interest Rates & Safety
These two elements—interest rates and safety—tie together because they are…well, connected. Savings bonds are issued by the United States Treasury, which is the borrower behind the bond. Certificates of deposit are issued by banks, and banks are the borrowers. Both, however, have the same risk levels, which is virtually zero.

The certificate of deposit, despite being a loan to the bank, is essentially as risky as investing in the Federal Government, since the Federal Government, through the FDIC, insures all certificates of deposit against losses on amounts up to $250,000 per person, per bank. Thus, if the Treasury can’t pay on a savings bond, then it is equally likely that they can’t pay on certificates of deposit purchased at failed banks.

Investing 101 tells us that risk and reward are connected. The greater the risk, the greater the reward; so, in terms of interest rates, there is no real difference between the two, at least not to a degree that people would notice. Instead, the biggest difference is that certificates of deposit allow you to lock in rates for only 5 years whereas savings bonds allow you to lock in rates for as long as 30 years.

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