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Understanding bonds: Weighing up corporate bonds and government bonds

by , 05 May 2015

When you buy bonds, you lend the bond issuer money. In return for this ‘loan,' the bond issuer pays you interest until the bond matures.

There are two main types of bonds you can buy: Corporate bonds and government bonds.

So what's the difference between these types of bonds?

Read on to find out…

What are bonds?

Bonds are known as fixed-income securities. This is because for the term of the bond, the bond issuer will pay a fixed interest payment to the holder of the bond.

The interest paid depends on the maturity of the bond and the bond issuer.

Buying bonds is less risky than investing in shares, but they still come with some risk.

The ins and outs of government bonds

A government bond is when you lend the government money.

An easy way for South Africans to buy South African government bonds is to buy retail savings bonds. Or you can buy into unit trusts or exchange traded funds (ETFs) which invest in these types of bonds.

Broadly speaking, government bonds are the ‘safest’ bonds to buy as there isn’t a high chance of a government defaulting on them. But of course, this isn’t always the case and some governments do get into financial distress.

How corporate bonds differ from government bonds

When you buy corporate bonds you’re lending money to corporations. The risks associated with these bonds differs greatly depending on the issuing company.

Different credit ratings agencies rate the risks associated with different bonds and this can give you an idea of how risky they are.

If a company pays a high rate of interest in comparison with other firms, it can indicate that it’s more risky and there’s a higher chance of default.

Investing directly in corporate bonds can require a large lump sum, but you can do it through your stock broker. You can also invest in corporate bonds through unit trusts and ETFs.

So there you have it, weighing up corporate bonds and government bonds.

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Understanding bonds: Weighing up corporate bonds and government bonds
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