Welcome to the Weekly SUMmary - 05/28/2021
What are CDs and Bonds? Are they different?
The short answer is, they are very different.
First, let’s start by clarifying that a CD is a Certificate of Deposit. Merriam-Webster defines it as:
a money-market (short-term debt investment) bond of a preset face value paying fixed interest and redeemable without penalty only on maturity
This is a fair and accurate description. Let’s break down the name. You are Depositing money and receiving a Certificate. The bank is paying you a guaranteed interest for a specified amount of time. The bank get’s to use the money you deposit in any way they choose as long as they can honor the redemption upon request.
Let’s shift to bonds. (Bonds are more complicated.) If I were a betting person I would say that the reason most people who attempt the exam have not received their securities license is because they did not pass the Bond area of the (securities) exam.
Merriam-Webster has many definitions:
: an interest-bearing certificate of public or private indebtedness
This is the tip of the iceberg. There are many types of bonds. The Financial Industry Regulatory Authority (FINRA) breaks them down as:
- US Treasury Securities
- US Savings Bonds
- Mortgage-Backed Securities
- Corporate Bonds
- TIPS and STRIPS
- Agency Securities
- Municipal Bonds
- International and Emerging Market Bonds
If that seems like a lot, visit their site in the link below and try to read about a few of these types of bonds.
In addition to knowing just the types of bonds there are, one should know that bonds will have different interest rates that can be adjustable or fixed, can have different maturities and a different cost.
People can choose to invest in bond funds, a bond, or a group of bonds which will have different risks associated with each. Bond funds can be actively or passively managed and will typically focus on one or two types of bonds within each fund.
I’ve included a link to Investopedia that has a lot of great information regarding bonds, below.
As you can imagine, this is just the beginning of understanding bonds. If you’d like to discuss in more detail, seek a professional.
Do SUMthing smart with your money.
This post is intended to be educational in nature and not to be construed as advice or recommendations.
Bonds are subject to increased loss of principal during periods of rising interest rates, and are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investing involves risk and the potential to lose principal.
Links are provided as a courtesy. We make no representation as to the completeness or accuracy of information provided at any unaffiliated third-party site.