Government Bonds vs Corporate Bonds: Key Differences

When I build a fixed-income plan, I always start by asking a simple question: what am I lending against? That single prompt frames the entire discussion on government bonds vs corporate bonds. Both are debt instruments, both pay interest, and both carry market risk. Yet the sources of risk—and the trade-offs I accept—are not the same.

Who borrows from me?
 With government bonds, I lend to the sovereign. In India, that usually means central or state governments issuing G-Secs, T-Bills or SDLs. The repayment capacity flows from the government’s ability to tax and borrow; hence, default risk is considered extremely low. With corporate bonds, I lend to a company—PSU or private, financial or non-financial. Here, my assessment leans heavily on cash flows, leverage, asset cover, and governance. The issuer’s business cycle matters far more.

What risk am I paid for?
 Both categories are exposed to interest-rate risk: if yields rise, prices fall, and vice versa. The differentiator is credit risk. Government bonds typically compensate me mainly for duration and liquidity; corporate bonds compensate me for those and for the chance—however small—of a missed payment. This is why well-rated corporate issues usually offer a yield spread over comparable G-Secs. I view that spread as my “price” for shouldering credit risk.

How do I read safety and structure?
 Sovereign paper stands on the government’s balance sheet. Corporate bonds, by contrast, depend on issuer strength and the instrument’s design. I examine whether the bond is secured or unsecured, if there are covenants, whether there are put/call options, and the ranking in the repayment waterfall. Credit ratings (AAA to below-investment grade) are a useful starting point, not a verdict. I always pair ratings with basic ratio checks and recent disclosures.

What about liquidity?
 Government bonds enjoy deep, active markets and are widely traded by banks, insurers, and institutions; retail access has improved through brokers and online platforms. Liquidity in corporate bonds varies widely. Large PSU or top-rated financial issuers tend to trade more frequently, while mid-sized names can be buy-and-hold. If I may need to exit early, I prefer larger, frequently traded series and check recent traded volumes rather than assuming liquidity will show up when I want it.

Cash flows and visibility
 Most bonds offer fixed coupons paid semi-annually or annually; some corporate issues provide monthly or quarterly payouts, which can be useful for cash-flow planning. Amortising structures—more common in corporate paper—return principal in parts, reducing duration over time. I align these features with my liabilities: predictable obligations pair well with predictable schedules.

Documentation and transparency
 Government securities come with standardised terms and broad transparency. For corporate issues, the offer document is essential reading: use of proceeds, financials, covenants, and risk factors are all there. When I see clarity on security, escrow mechanisms, and monitoring, I gain confidence in the discipline around repayments.

Tax considerations
 Coupons from both government and corporate bonds are typically taxed as income. Capital-gains treatment can differ based on holding period, listing status, and prevailing regulations. Because tax rules change, I check the latest norms before taking a position or planning an early exit.

So, how do I choose?
 I don’t frame it as either-or. Government bonds anchor stability and price discovery in my portfolio; corporate bonds add incremental yield when the issuer quality and structure justify it. By matching duration to my horizon, judging credit thoughtfully, and insisting on clear terms, I use both to construct a steadier fixed-income core. That, to me, is the practical edge in navigating government bonds vs corporate bonds today.