Government vs Corporate Bonds

What this unit covers

Compare government and corporate bonds on real risk and return: why a corporate bond usually pays more, and what that extra payment compensates for.

By the end you will be able to

• Explain why a bond's rate reflects who is borrowing and how likely they are to repay.
• Compare a government bond and a corporate bond by risk, not only by rate.
• Identify a higher promised return as compensation for extra risk.

How it starts: Two Ways to Lend Your Savings

1. You are choosing between two bonds for a year of spare savings.
2. One offers 7 percent, the other 9.5 percent on the same 1 lakh rupees.
3. Why would anyone accept the lower rate when both promise a fixed return?

Words you will meet

Government bond

A loan to the government, repaid with near certainty because it can raise money through taxes.

Corporate bond

A loan to a company, repaid only if its business earns enough to cover the payment.

Credit risk

The chance that a borrower fails to repay interest or principal in full or on time.

Coupon

The fixed interest rate a bond promises to pay its lender.

Sovereign backing

A government's power to tax and manage its currency, which stands behind its bonds.

In this module: Interest Rates & Bonds

1. What Are Bonds?
2. Government vs Corporate Bonds (this unit)
3. Interest Rates & Bond Prices
4. Yield Curve Simplified