Public and private companies and government bodies issue bonds to the general public to raise capital. This capital is used by companies for further business activities and in infrastructure and development projects by government bodies. Bonds offer fixed returns, steady payouts, and are a secure long-term investment option for people. Here, we will focus on corporate bonds and treasury bonds specifically.
What are Corporate Bonds
Corporate bonds in India are debt instruments issued by companies to generate funds for various business activities like adding a product line, investing in other projects, expansion, etc.
Interest on corporate bonds is higher for bondholders, which ranged between 7% to 12% in the year 2021, depending on the bond’s rating. Corporate bonds with higher ratings (AAA-rated) offer lower coupon or interest rates as they are less riskier than bonds with a lower credit rating (A-rated).
What are Treasury Bonds
When bonds are issued by the central government or the state government, they are called Government bonds. Treasury bonds meaning Government bonds. Government bonds may be issued for the short-term or long-term. Bonds that the government issues with a maturity period of less than one year are called Treasury bills while bonds with a maturity period of a year or even more are called bonds.
- Treasury bills: Treasury bills are money market instruments released by the government, and currently, they are available for three tenors- 91 days, 182 days, and 364 days. The treasury bond rate is zero since these are zero-coupon bonds, meaning there is no interest offered on treasury bills. The treasure bonds yield comes from the discount at which they are available. You can buy treasury bills at a discount and then get them redeemed at their face value when they complete their tenure.
- Government bonds: Government bonds, also known as Government securities or G-Secs, are long-term debt instruments issued by the government at a fixed or floating rate of interest. The maturity period of these bonds is usually between 5 to 40 years and the interest on these is paid usually on a half-yearly basis. The returns on G-Secs are usually low. For example, the G-Sec issued by the government in January 2018 for a 10-year tenure gives a half-yearly interest at 7.17%.
The return on corporate bonds, especially with a lower rating, is higher than treasury bonds, primarily because treasury bonds have a much lower risk of default as they are backed by the government. While purchasing a bond, is it advisable to look at the overall safety and returns of the bond.