Key Differences Between Government Bonds and Corporate Bonds
When I first built my fixed-income allocation, I kept returning to one basic question: what is the difference between government bonds and corporate bonds, and which combination suits my goals? Both instruments promise scheduled income and repayment at maturity, yet they behave differently in real portfolios. Understanding those differences—issuer strength, risk-return, liquidity, and tax treatment—has helped me choose with confidence.
Who stands behind the promise
The issuer is the anchor. Government bonds are backed by the sovereign—central or state governments financing public spending. That backing translates into very low default risk. Corporate bonds, by contrast, are issued by companies to fund expansion, refinance debt, or manage working capital. Here the safety depends on the issuer’s financials and the credit rating. A AAA-rated utility, for instance, is not the same as a BB-rated small manufacturer. Same word “bond,” very different risk.
How risk converts into return
I try to read yield as a story about risk. Government bonds usually offer lower yields because the market prices in the sovereign’s strength. Corporate bonds typically pay more to compensate for business risk and subordination in the capital structure. If a 7-year government bond yields ~7%, a high-grade corporate of similar tenor might offer ~9–10%. That extra spread is not “free”; it is payment for taking on issuer-specific risk. My approach is to ladder maturities and mix ratings—seeking incremental return without letting any single exposure dominate the portfolio.
Liquidity in real life
Liquidity matters most when I need to sell. Government bonds benefit from deeper secondary markets, active institutional participation, and tighter bid-ask spreads. Corporate bonds can be patchier, especially for smaller issues. Access has improved meaningfully, though. On platforms such as IndiaBonds, I can view live quotes, credit summaries, and terms in one place and place orders with clarity. That transparency has made corporate debt a practical option for individual investors who value price discovery.
Tenor, cash flows, and taxes
Both instruments come in varied tenors and coupon schedules—annual, semi-annual, or quarterly. I use that to match cash-flows with outlays like school fees or SIP top-ups. For taxation, the interest from both government bonds and corporate bonds is taxed at my slab rate, while capital gains depend on holding period and instrument type. Because rules can evolve, I prefer to check the latest guidance before committing to long tenors.
Where each fits in a portfolio
If I need ballast—capital preservation and predictability—I lean on government bonds. When I want to lift portfolio yield without leaping into equity-like volatility, I add carefully selected corporate bonds, prioritising rating strength, covenants, and issuer disclosure. The mix changes with the rate cycle: when policy rates are high, locking longer tenors feels sensible; when rates look set to rise, I keep duration shorter and reinvest.
A simple decision framework
- Start with safety: define the minimum rating you are comfortable holding.
- Decide the income rhythm: monthly or semi-annual coupons.
- Diversify: spread across issuers and maturities.
- Use live market tools: compare yields, documentation, and liquidity on IndiaBonds before placing orders.
Bottom line: the real difference between government bonds and corporate bonds is not just yield; it is the nature of the promise you rely on. Government paper offers near-sovereign certainty; corporate debt offers incremental return for measured risk. Blend the two with purpose, and fixed income becomes more than a parking lot—it becomes a steady, designable engine for long-term goals.