Treasuries vs. Short-Term Corporate Bonds

by Will Gish

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

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

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.

Time Frame

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.

Interest

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.

Expense

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.

Demand

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.

About the Author

Will Gish slipped into itinerancy and writing in 2005. His work can be found on various websites. He is the primary entertainment writer for "College Gentleman" magazine and contributes content to various other music and film websites. Gish has a Bachelor of Arts in art history from University of Massachusetts, Amherst.

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