Bonds give investors a way to earn regular payments at a fixed amount. This makes them ideal for beginners or those who want to add sources of stable income to their portfolios.
If you’re interested in bonds, there are two types to know: corporate and government bonds. Find out their similarities and differences to see which one is best for you.
What are government bonds?
The Philippine government, through the Bureau of Treasury, issues these bonds. They are also called Treasury bonds or sovereign bonds.
Investing in government bonds means you are lending money to the state to help fund projects like road works. In return, you’ll earn interest at a fixed rate in the form of coupon payments.
You will receive payments on a set schedule until the bond matures. Upon maturity, you’ll get back the original price of the bond – also known as the face value – and any final interest.
What are corporate bonds?
Like the government, SEC-registered private corporations issue bonds to raise capital. They may use the money to expand or maintain their operations.
If you want to check where the money will go, read the corporate bond prospectus. This document includes all details investors need to know about the bond and its issuer.
Are corporate bonds and government bonds similar?
Both bonds are debt securities that are used to raise money. They are well-suited for investors with a moderate risk profile.
Besides these, here are the key similarities between corporate and government bonds:
- Regular income – Though schedules may differ, bonds offer regular returns through coupon payments. This will give you a fixed income on top of your other sources of revenue.
- Passive management – Bonds are not as volatile as other investments like stocks. You won’t need to worry as much about the effect of market trends on your investment.
While interest rates can affect bond values, they will not change your earnings if you’ll keep your bond until maturity. Interest rates matter if you’re comparing bond issuances.
Rising interest rates mean bond prices will fall, making newer issuances more attractive than older ones and vice versa.
Since they’re less volatile, bonds are relatively easy to manage and require little oversight.
- How to invest – There are direct and indirect ways to earn from both bond types. One method is to buy directly from authorized agents or through brokers in the secondary market.
Another way to invest is to put your money in pooled funds that include bonds. You can explore balanced funds that combine bonds with stocks and money market instruments.
There are also bond funds that invest mostly in bonds.
Though corporate and government bonds are somewhat alike, this doesn’t mean they’ll always behave the same way. There are key differences to keep in mind before you invest.
What are the differences between corporate bonds and government bonds?
The main difference between these types of bonds is the issuer, and this creates distinctions in the following areas:
- Default potential – Anyone who takes out a loan runs the risk of being unable to pay it back, public and private institutions included. However, the government is far less likely to default on its debt as this only usually happens after extreme events like war or economic collapse.
Corporations, on the other hand, have higher odds of defaulting since they do not have the same financial resources as the government.
To know if a default is probable, look at the bond rating. This is a score based on many factors, including the issuer’s history and capacity to pay debt. Credit or bond rating agencies assess the creditworthiness of corporation and assign the ratings to their bonds based on the issuer’s ability to repay debt.
- Interest rate – Since corporate bonds are relatively more likely to default, they make up for it through higher interest rates, which means bigger payouts. Even companies with a good bond rating may offer higher returns than the government.
- Payment schedule – For government bonds, you’ll receive interest payments quarterly or every 3 months until maturity. Companies issue payouts every quarter or semi-annually depending on the bond.
- Market influence - Corporate bonds are influenced by both the macroeconomic factors and financial performance of the issuer. Meanwhile, government bonds are primarily affected by macroeconomic factors, such as inflation expectations, interest rate changes and overall market condition.
Government bond yields are often used as benchmarks for other fixed-income instruments.
Which is better: corporate bonds or government bonds?
Each type of bond has its pros and cons though they have the same risk suitability. Your confidence in the issuer could be the deciding factor when making a choice.
Remember to look for a creditworthy issuer that’s unlikely to default or go bankrupt. You may find that both bonds have a place in your portfolio if you want to diversify.
