Government bond vs corporate bond
A government bond is a loan to the government, repaid with near certainty because it can raise money through taxes. A corporate bond is a loan to a company, repaid only if its business earns enough to cover the payment. A higher rate is not the market being generous: it is the market pricing the extra credit risk.
Government bond and Corporate bond side by side
| Government bond | Corporate bond | |
|---|---|---|
| Who borrows | The government | A company |
| What stands behind the promise | Sovereign backing: the power to tax and to manage its own currency | The company's income from selling goods or services |
| Credit risk | Lower | Higher; income can fall in a bad year |
| Rate offered | Lower | Higher, to attract money despite the extra risk |
| What both promise | A fixed interest rate, the coupon, and your money back later | A fixed interest rate, the coupon, and your money back later |
| Is repayment certain | Almost always, but not a guarantee | No; it depends on the business covering the payment |
A promise is only as good as the one making it
A bond is a loan you give to a borrower, who promises to pay you interest and return your money later. Both kinds promise a fixed rate, called the coupon. But a promise is only as good as the borrower making it.
Why the government is safer
A government can raise money through taxes and manage its own currency, so it almost always keeps its word. A company depends on selling goods or services, and its income can fall in a bad year, so it may struggle to repay everyone in full. This chance of not being repaid is called credit risk.
Why the rate is higher on the riskier one
Nobody would lend to a less certain borrower at the same rate as a very certain one. So the less certain borrower must offer more to attract the same money. A higher rate is not the market being generous. It is the market pricing risk.
Questions to ask
Before the extra rate feels attractive, ask who promises each payment and what could stop it from being kept. Ratings change, so check the current one and its date. Maetis does not give investment advice.
Two bonds for the same money (hypothetical numbers)
Suppose you put ₹50,000 in a government bond paying 6 percent and the same ₹50,000 in a company bond paying 10 percent. After a year the government bond pays ₹3,000 and the company bond ₹5,000. The extra ₹2,000 is the price of accepting the chance that the company does not repay in full.
Common questions
- Which is safer, a government bond or a corporate bond?
- A government bond usually carries lower credit risk, because a government can raise money through taxes. Neither is entirely free of risk.
- Why do corporate bonds pay a higher rate?
- Because a company is less certain to repay, and the higher rate pays for that credit risk.
- What is a coupon?
- The fixed interest rate a bond promises to pay its lender.
- Can a corporate bond lose money?
- Yes. If the company cannot cover its payments, you could receive less than promised.
Related terms
This page compares ideas and does not recommend either one. Maetis does not give investment, tax or legal advice.