Why Are Corporate Bond Interest Rates Higher Than Government Bond Interest Rates?

Corporate bond rates are generally higher because they entail more risk.

Bonds issued by corporations and by governments a set interest. Interest rates on corporate bonds are often higher than government bonds because the corporations are judged a higher risk of defaulting on their obligation.

Features

Issuers of bonds generally set the interest rate of their bonds at the lowest rate sufficient to attract buyers. Issuers who are deemed less credit worthy generally have to set these rates higher to compensate purchasers for the increased risk that they will miss payments. The creditworthiness of a bond issuer is usually rated by a credit-rating agency, such as Moody's or Standard & Poor's.

Significance

Governments are often considered by credit rating agencies and investors to be at relatively low risk of defaulting on their loans. The U.S. federal government, for example, maintains a "AAA" credit rating, the highest possible. The rating of individual corporations depends largely on the business' financial health and credit history.

Considerations

Governments are not always deemed better credit ratings than corporations. For example, as of February 2010, blue-chip companies that include Exxon Mobil and Johnson & Johnson maintain a "AAA" rating from Standard & Poor. This is far higher than a number of U.S. cities, some of which hold "junk bond" status.

References

• Investing in Bonds: About Government/Agency Bonds
• Investing in Bonds: About Corporate Bonds
• U.S. Securities and Exchange Commission: Bonds, Corporate
• The Market Oracle: U.S. Treasury Bonds Interest Rate Yield Curve Steepest Since 1980
• CNN Money:Buffett's Berkshire loses top S&P credit rating