The bond market allows investors to purchase debt as a security. Corporate bonds constitute single pieces of a larger loan that the issuing organization creates. For instance, assume a company requires a $1 million loan. It can issue 1,000 $10,000 bonds. When bonds reach maturity, the issuing organization pays back investors by repurchasing the bond. The U.S. Department of the Treasury issues bonds as a form of government funding. Various differences exist between government bonds and corporate bonds.
Treasuries constitute any debt security sold by the Department of the Treasury. These securities include Treasury bills, Treasury notes and Treasury bonds, as well as Treasury inflation-protected securities (TIPS), I Savings Bonds, and EE/E Savings Bonds. The difference between bills, notes and bonds lies in the maturity period, which can range from a few weeks to 30 years. Treasuries pay interest at predetermined intervals, usually six months. This interest constitutes the profit made from investment in government-issued securities.
Corporate bonds constitute securities sold by corporations in order to balance the need for keeping issued stocks at manageable levels, while bringing in new capital. Types of corporate bonds include ultra short-term, short-term, medium-term and long-term bonds. Generally, short-term bonds mature in a period of less than five years. Ultra short-term bonds mature in a matter of weeks. Like treasuries, corporate bonds pay interest at regular intervals.
Treasuries reach maturity after varying time periods. A Treasury bill, for instance, matures in 52 weeks or fewer. A Treasury bond matures at 30 years of age, while a Treasury note can mature after two, three, five, seven or 10 years. Short-term bonds, on the other hand, mature in a period of five years or less. Investing in Treasuries allows for more choices when it comes to maturity time frame. However, those looking for short-term securities can find exactly what they need in short-term corporate bonds.
Treasury interest rates relate to the maturity date on a security and the economy at the time of interest payment. Average Treasury interest rates stood at 0.11 percent for bills, 2.3 percent for notes and 5.8 percent for bonds as of August 2011. The Department of the Treasury publishes rates on a monthly basis. Interest rates on corporate bonds vary wildly and depend upon considerations such as the nature of the economy, the frequency of interest payments, and the corporation issuing the bond. Short-term corporate bonds pay less interest than medium-term or long-term bonds because they pay interest over a shorter period of time.
All treasury securities come in multiples of $100, with a minimum investment of $100 as of 2011. Investors can chose bills, notes and bonds in amounts into the millions of dollars. Corporate bonds, on the other hand, come with a fixed price. The cost of investing in enough bonds to minimize risk through diversity is too high for common investors. Treasury bonds can be a sounder investment for those purchasing a minimum number of debt securities.
Supply and demand in a recession causes corporate bond prices to rise, and rates to fall, which leads to a devaluation of these securities. In such times, Treasury bonds become more attractive to investors due to more secure prices and interest rates.
- “Bond Evaluation, Selection and a Management”; R. Stafford Johnson; 2004
- Treasury Direct: Securities and Programs
- “Corporate Bond Fund or Individual Treasuries: Which is Better?”; Eric E Haas; 2005
- “International encyclopedia of Mutual Funds, Closed-end Funds, and REITs”; Peter Madlem et al; 2000
- “Love Long, Live Rich”; H Craig Rappaport; 2007
- US Securities and Exchange Commission: Bonds, Corporate
- Treasury Direct: August 2011 Securities Interest Rates
- Stockbyte/Stockbyte/Getty Images