Government vs Corporate Bonds

Introduction

Bonds are issued by different borrowers with very different risk levels. This lesson compares government and corporate bonds, and explains credit ratings.

Government Bonds

Government bonds are issued by states to fund spending. They are usually the safest bonds in a country because a government can raise taxes to repay its debt (currency-issuing governments can even print money).

• Very low default risk (for stable, developed governments)
• Lower yields
• Used for safety and stability

Corporate Bonds

Corporate bonds are issued by companies to fund operations or growth. They pay more interest than government bonds because they carry higher default risk — companies can go bankrupt.

• Higher yield (credit spread over government bonds)
• Higher risk
• Range widely by company quality

Credit Ratings

Agencies rate issuers' creditworthiness:

• Investment grade — high quality, lower risk (e.g., AAA to BBB)
• High yield / "junk" — lower and speculative ratings (e.g., BB and below), higher yield for higher risk

The Risk-Return Trade-Off

Government bonds:  lower risk, lower yield
Investment-grade corporate:  moderate risk/yield
High-yield ("junk"):  higher risk, higher yield

Real-World Example

A stable government issues bonds at 3%. A solid company issues 10-year bonds at 4.5% (the extra 1.5% is the credit spread for default risk). A struggling company issues "junk" bonds at 8% to attract investors.

Summary

• Government bonds are usually the safest; corporate bonds pay more
• Corporate default risk is why they pay a higher yield
• Credit ratings separate investment grade from high yield ("junk")
• Higher risk generally comes with higher yield
• Choose based on your risk tolerance and diversification needs

Next Lesson

Now, pooled investing: mutual funds and ETFs.