Bank Deposits and Bonds
Bank Deposits and Bonds are two different financial instruments with different purposes and functions. Bonds are investment securities where an investor lends money to a borrower (Typically Corporate or Government) for set period of time, in exchange of regular interest payments. Once Bonds reaches maturity, the bond issuer return the investor money. A deposit is the act of placing cash with some entity, most commonly with a financial institution, such as a bank where financial institution pay some monetary benefit for placing cash such as interest. The only difference between Bonds and Deposit is that lenders cannot ask money before maturity however in Deposit lender can withdraws money at any time. Both bank deposits and Bonds are considered safe-haven investments with modest returns and low risk.
Benefits of Bank Deposits and Bonds
Less Volatile
Bonds have a clear advantage over equities. The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks). Bonds do not suffer from high equity market volatility. Even interest payments of bonds are higher than general level of dividend payments of equity stocks. Thus bonds are generally viewed as safer investments than stocks.
Liquidity
Bonds are highly liquid due to huge trading by institution in the market. It is often fairly easy for a lender to sell a large quantity of bonds without affecting the price much, which may be more difficult for equities. Bonds are attractive because of the comparative certainty of a fixed interest payment twice a year and a fixed lump sum at maturity.
Legal Protection
Bondholders are lenders and enjoy the legal protection, under the law of most countries, if a company goes bankrupt, its bondholders will often receive some money back (the recovery amount), whereas the company’s equity stock often ends up valueless.
Different Type of Bonds
There are different types of bonds based on investor needs like fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.
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