Savings bonds and certificates of deposit (CDs) are both debt securities that can be purchased commercially. Investors use both of these investment types to make income on money in a low-risk alternative to equities, real estate or other complex investment vehicles. For 2016, savings bonds are more advantageous than CDs due to rising interest rates.

Savings Bond Risk/Return Relationship Will Be Better in 2016

Both savings bonds and CDs are considered highly safe investments. However, federal savings bonds are regarded as the least-risky debt instruments because they have a credit rating of AAA and are fully backed by the federal government. This makes the risk of investing in a savings bond lower than the risk of investing in a CD.

Savings bonds pay a smaller interest rate on the invested principal than CDs to compensate for the lower risk. While the return of a savings bond is normally lower than a CD, it also provides greater security while still paying interest on a principal amount. In 2016, with fluctuating interest rates, volatile oil prices and the Greek debt crisis still looming, it's better to go with the debt investment with a AAA rating.

While savings bonds are considered to be safer, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank. So, if an investor is making a modest investment, it would be wise to discuss CDs and savings bonds with high credit ratings with a financial advisor prior to investing.

Savings Bonds Have Greater Flexibility in 2016

The Federal Reserve has already increased interest rates by a marginal amount for the first time in almost a decade. There is additional speculation that the Fed will increase interest rates again in 2016. This means that investors who want to invest in a debt instrument should prepare for the likelihood of rising or fluctuating rates.

There are two different types of government savings bonds. An EE bond is a fixed-interest bond that is guaranteed to double in face value over a 20-year period. The rate is fixed when the bond is purchased, and tax is deferred until the bond is cashed. An I bond has both a fixed and variable interest rate. The fixed rate is set when the I bond is purchased, and the variable rate is adjusted every six months based on consumer price inflation.

For 2016, it would make sense for investors to take advantage of fluctuating interest rates by purchasing I bonds. This protects them against further increases in interest rates with the variable component, and the fixed-rate component also protects against the possibility of flat or decreasing interest rates.

Time to Maturity Favors Savings Bonds

Savings bonds are essentially government borrowings by the United States. Common denominations range from $25 to $10,000, and an investor must wait at least six months before cashing in a savings bond. However, it's possible to hold onto a savings bond for as long as 30 years, which allows an investor to earn interest on the principal amount over the entire time period.

CDs, on the other hand, have time to maturities that generally range from one to five years. Once an investor purchases a CD, the principal amount is locked in for the entire life of the CD, and the financial institution issuing the CD can assess a heavy penalty for early withdrawal. After the CD's maturity is up, an investor has to shop around again for another CD with favorable rates. This makes the time to maturity favor investors who invest in savings bonds, which adds to the flexibility as outlined above.

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