Corporate VS Treasury Bonds - What’s The Difference?

Corporate VS Treasury Bonds - What’s The Difference?

Interest rate changes can alter the financial markets in a major way. While major institutions tend to invest in relatively low-risk long-term investments, such as S&P 500 index funds, rising interest rates can make bonds and other fixed-income securities very attractive investments. 

However, the bond market is far from homogenous and investors can come across debentures issued by a wide variety of sources. Chief among these are private companies and national governments. 

While the core structures of these investments are largely similar, there are still some key points of difference that investors should not overlook when making a decision. 

The primary difference between corporate and treasury securities is the degree of risk associated with investing in them. 

The viability of corporate bonds depends on the performance of the underlying business, while treasury bonds are sponsored by governments and generally carry less risk of default. 

If you are a beginner investor and would like to know more about the differences and similarities between corporate and treasury bonds, this Investfxo guide can help. 

Corporate And Treasury Bonds

Before diving deeper into the factors that differentiate corporate and treasury bonds, it is important to first understand what each of them are and why they are issued in the first place. 

What Is A Corporate Bond?

A corporate bond is a type of debt security issued by a private corporation or business entity to raise capital.

This may be done for a variety of reasons, such as expansion of business operations, refinancing of prior debt, increasing short-term cash reserves, etc. 

When an investor buys a corporate bond, they are essentially lending money to the issuing corporation in exchange for periodic interest payments (coupon payments) and the return of the bond's face value (principal) at maturity.

Corporate bonds are a common form of corporate financing and serve as a way for companies to raise funds. 

When a corporate bond is issued, a prospectus document is also required, which shows the latest financial performance of the issuing company, as well as the purpose of the bonds and other information, such as corporate structure, governance, etc. 

What Is A Treasury Bond?

A treasury bond is a debt security issued by a government entity, mainly the treasury, which operates similarly to a corporate bond and aims to raise capital for the government.

This may be to fund an infrastructure project, or any of the various government social projects. 

U.S treasury bonds are especially popular among investors, as they are considered as some of the safest investments available on the market. 

Core Differences Between Corporate And Treasury Bonds 

Corporate bonds and Treasury bonds are both debt securities, but they have some key differences based on their issuers, risk levels, and other characteristics.

 Here's a breakdown of the main differences between corporate bonds and Treasury bonds:

  • Issuer: Corporate bonds are issued by private companies, while treasury bonds are issued by state treasuries and are sponsored by the government
  • Risk: Due to their issuers, corporate bonds are generally riskier than treasury securities, as the risk of default is much lower for government bonds
  • Interest Rates: Due to the difference in risk, corporate bonds have higher interest rates than treasury bonds to make them more attractive to investors
  • Yield: The yield on a bond is influenced by its price and interest rate. Corporate bonds tend to offer higher yields than Treasury bonds, but this is due to the increased risk associated with corporate bonds
  • Maturity: Both corporate and Treasury bonds can have various maturities, ranging from short-term to long-term. Some corporations issue bonds in perpetuity
  • Credit Rating: Corporate bonds are assigned credit ratings by rating agencies (e.g., Moody's, Standard & Poor's) based on the issuer's creditworthiness. Treasury bonds do not receive credit ratings because they are considered risk-free
  • Liquidity: Treasury securities typically enjoy much higher liquidity on the market than corporate bonds, as the demand for treasuries is higher 

Key Takeaways From Corporate VS Treasury Bonds

  • Corporate and treasury bonds are popular methods for companies and governments to raise capital for various purposes
  • Corporate and treasury bonds are different in many ways, such as risk profile, liquidity, credit rating, interest rates, etc 
  • Investors tend to put more capital into corporate and treasury bonds when interest rates start to increase, making them more attractive as investments 
  • Treasury bonds are considered to be virtually risk-free, while corporate bonds may carry a varying degree of risk

FAQs On Corporate VS Treasury Bonds

Are corporate bonds better than treasury bonds?

Corporate bonds tend to have higher yields than treasury bonds, but they also carry considerably more risk, as they are subject to business risks, while treasury bonds are sponsored by the government.

Do corporate and treasury bonds have different rates?

Yes. Corporate bonds have higher interest rates and yields than treasury bonds due to their inherent risks.

Certain types of corporate bonds have much higher rates than others because of their lower credit ratings. 

Are treasury bonds safer than corporate bonds?

Yes. Treasury bonds have a considerably lower risk of default than corporate bonds, as they are sponsored by the government and backed by national economies. 

When treasury bonds default, it is a sign of deep-seated economic instability in the issuing country.