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What is a Bond
Bonds are financial instruments in which an investor lends money to a company or the government for a set period of time in exchange for interest payments. When the bond matures, the bond issuer returns the investor’s money.
Bonds are thought to be a safe investment by investors. When the stock market is volatile, most of the investors switch their funds from the stock market to the debt market. In addition, investors believe that bonds are ideal for a portfolio that requires a steady stream of income.
Advantages of Investing in Bonds
- Fixed Returns on Investment: Bonds are a type of fixed investment that pays interest on a regular basis. Furthermore, when a bond matures, you will receive the principal amount that was previously deposited.
- Less Volatile: Bonds are typically less volatile than stocks, despite the fact that their value may fluctuate depending on current interest rates or inflation rates. In comparison to stocks, they are also less risky.
- Ratings: Bonds, unlike equities, are rated by credit rating agencies all over the world.
When planning to invest in bonds, an investor will typically come across mainly two types: Government bonds and Corporate bonds.
Corporate Bonds vs. Government Securities has always been quite debatable. However, both have their own set of risks and advantages as investment instruments. Let’s see which is the better investment choice:
What are Corporate Bonds
A corporate bond is a type of debt security that a company issues and sells to its investors. The company obtains the capital it requires by issuing bonds. In exchange, the investor receives a predetermined number of fixed or variable interest payments. The payments stop when the bond “reaches maturity,” and the original investment of the bond is returned later.
What are Government Bonds
A government bond is a bond that the government issues to raise funds in the domestic market. The Reserve Bank of India (RBI) supervises government bonds, which are mostly issued by the central government. The RBI issues bonds on behalf of the government and auctions them to investors. The government issues bonds to raise funds for projects related to public welfare and infrastructure development. Investors who purchase bonds would receive a regular and fixed interest rate from the government. On the maturity date, the investors will be paid the principal value of the bonds.
Corporate Bonds vs Government Bonds
| Basis | Corporate Bonds | Government Bonds |
| Meaning | Corporate Bonds are securities issued by private and public companies whether listed or unlisted. | Government Bonds are securities issued by the central government and state government. |
| Issuing Authority | Private and public sector Companies issue these Securities. | On behalf of the government, the Reserve Bank of India issues securities. |
| Regulatory authority | Corporate securities are regulated by the Securities Contract (Regulation) Act and SEBI. | Government is the regulatory authority. |
| Risk Profile | Corporate bonds are riskier than government bonds as they have chances of default. But they have been rated by credit rating agencies. | Government bonds are the safest investment options as they contain a sovereign guarantee. |
| Yields | Since investing in corporate bonds contains higher risk, it yields better returns compared to government bonds. | Government bonds being safe haven assets have lower yields than corporate bonds. But yield also depends upon the duration of the bond and few other economic factors. |
As an investor, if you are looking for a fixed-income at regular intervals, then a bond or G-sec might be the solution. These are lower risk instruments as it is a debt instrument ensuring capital protection. Both corporate bonds and government bonds are good instruments in fixed income. However it is always advised; before making any investment, one should do research and invest in those types of bonds that fulfill his financial goals and suit your financial well being.
Frequently Asked Questions (FAQs)
1. Which one is better? Corporate Bonds or Government Securities?
Corporate bonds vs Government bonds is a hot topic. Government bonds are the safe fixed income options as they contain a sovereign guarantee whereas
corporate bonds are riskier than government bonds being issued by private and public companies. But with high risk there is high return. Thus both the bonds have their respective traits and investing in them should be dependent on clients needs and risk profile
2. Are Corporate Bonds riskier than Government Bonds?
Corporate bonds are riskier than government bonds but with higher risk there is higher return as well, also companies having higher credit ratings have a lower chance of defaulting while higher risk factors are associated with those who have lower credit ratings.
3. What returns can I expect from Corporate Bonds?
It all depends on the market situation and credit rating of the company. The interest rates are also dependent on overall interest rates in the economy. . The returns on the corporate bonds range from 5%pa to 10%pa.. While buying the bonds from secondary market, the investors need to check yield to maturity (YTM) instead of coupon rate. YTM depends on the current market price of the bond and coupon rate.
4. According to the current scenario, which is better- Corporate Bonds or Government Bonds?
Government bonds are always considered safer in comparison with corporate bonds due to the backing of the government even though both the paper consists of a rating of AAA because the chances of default by governments are very less likely then any corporate or company.
Read more :
Corporate Bond Funds: Basics, Benefits & More
All about Corporate Fixed Deposit- How to Invest, Returns, Taxes, and More
