Bond Investment: Government Bonds and Corporate Bonds2011 Dec 16
Corporate Bonds and Government Bonds
Today I want to discuss another untraditional topic. However, this topic concerns the most traditional investments – bonds. Bonds been used for very long time and now there are so many types of the bonds and similar fixed income securities.
Normally bonds are fixed income security that provides for the investor (lender) interests and at the end of bond’s maturity redeems the par value of the bond. Also may be possible that bonds do not pay any interests but are discount bonds and are redeemed at higher price than was sold to the bond investors. Bonds are much more conservative investments than stocks, but still may carry a lot of riskiness in form of junk bond.
But in this article I would like to concentrate on two types of bonds: corporate bonds and government bonds. As they name says the difference between these types of bonds is the issuer. Corporate bonds are issued by corporations, which are private sector companies, and government bonds are issued by government or we can say by country.
Traditionally government bonds have looked much safer investments. As they say, government cannot go bankrupt. And maybe that is true, but another true is that government may default. And there were many cases when governmental bonds have defaulted. And I’m sure that we will see in the future also many defaults. The recent example of Greece bonds is also remarkable. The bonds of Greece didn’t default totally, but the write down of half bond redemption value is very close to default (because very probable that in case of corporate bond default you also would lose not more than half of in bonds invested capital value).
So now everyone agree that defaults of government bond are possible and investing in bonds of such countries may be risky. But aren’t those bonds still overpriced in the markets? That is true including US, Japan and most stable countries of the Europe. Most of these countries are still paying low interest compared to bonds of strong corporate.
Which Investment Is Riskier?
What I want to ask? Is it corporate bonds as an investment asset class riskier that government bonds? Well, I very doubt that. The thing is governments are ruled by politicians and corporations are ruled by top management. Which one is more reliable? Of course management of corporations also may be corrupted (as we recently witnessed it with Olympus case) but politicians always prefer political interest instead a financial or economical. It has always been like this and it will be always like this. Politicians are politicians.
And when hard times comes for countries with large debt obligations and budget deficit then political impotence can be a real damage for country’s financial health. When a big and strong corporation gets in problematic situation it does not hesitate to take decisive required actions. They will do anything is needed to stabilize the situation and will do it fast and in time.
By Rokas Lukosius
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