The bond issuer is the entity which is responsible to perform on the obligation defined by the security. Governments, corporations, and even central banks are able to issue bonds.
Government bonds are issued by the Government. When buying a governmental bond, one lends money to the government with a prespecified interest rate and duration.
Investing in government bonds are considered to be safe, as the issuer is the state itself – one of the biggest and most stable player on the financial market. At maturity, the state guarantees to pay back the principal amount along with the outstanding interest rates.
There are several benefits of investing in government bonds:
They are safe, because the payments – including both the principal and the interest rates – are guaranteed by the government. These claims never expire; they have no forfeiture deadline.
Governmental bonds are sold on market price before maturity. Bonds are flexible investments, as there are multiple possibilities (regarding duration and face value) in circulation on the market.
With buying corporate bonds (or corporates) one can lend money to firms with a prespecified duration, in exchange of periodically paid interests. Duration means the period of time in which the corporation pays interest rates periodically. The investor cannot withdraw the principal until the end of that period. The firm undertakes to repay the principal (also called face value) at maturity.
Compared to government or treasury bonds, corporates have higher returns, but are riskier.
Despite the risk, corporate bonds also have benefits:
One can easily choose the desired degree of risk and return. There are firms officially considered safe by credit rating agencies. Corporates usually pay higher returns than government bonds in exchange for the moderate risk and capital guarantee. The difference between the two types of bonds can reach up to 2-3% on a yearly basis.
Corporate bonds can be sold anytime, if one needs the invested capital before maturity. When withdrawing a bank deposit, all interest payments are going to be lost. However, selling corporate bonds before maturity may even result extra profits.