What’s the difference between corporate bonds and government bonds?
Fixed income securities can take many forms, but the two largest bond markets open to investors are government-issued bonds and corporate bonds.Chances are, if you want to invest in bonds, you’re going to purchase one of these two types of securities.
Choosing between the two can be hard. In many ways, these investments are similar, but there are also important differences that you need to be aware of, especially when it comes to risk.
What are government bonds?
Government bonds are issued by governments and are usually denominated in the country’s currency or in US Dollar. In the UK, bonds issued by the UK government are in pounds sterling and are called gilts.
Gilts are fixed-interest securities that the British government issues when it wants to raise capital. Investors who buy gilts will get back the capital they invest upon maturity as well as receiving interest at regular intervals throughout the term.
Gilts are considered to be very low-risk because it’s unlikely that the UK Government will default and be unable to pay its liabilities to investors.
An example of a government bond
A gilt looks like this: “Treasury stock 3.5% 01/01/21”.
So if you buy this UK government bond, you would receive a coupon of 3.5% each year until the bond matures in January 2021 when you receive back the total that you originally invested.
What are corporate bonds?
A corporate bond is issued by a company seeking to raise capital.
Just like government bonds, investors who buy corporate bonds are rewarded for the risk they take with the return of the initial amount of money that they invested upon maturity and payment of interest throughout the term.
Corporate bonds are generally riskier than gilts, as a company is more likely to default than a stable government. As a result, corporate bonds offer a higher rate of interest.
An example of a corporate bond
A corporate bond looks something like this: “Netflix 5% 07/2022”.
So if you buy this bond, you receive a 5% coupon…
As with all investments your capital is at risk. WiseAlpha members purchase Notes which are fractions of individual corporate bonds.
