What Is the Difference Between a 20 Year Treasury & Corporate Bond?
The differences between a 20-year Treasury bond and a corporate bond are vast. One of the major differences is that investors consider U.S. treasury bonds to be a safer investment than corporate bonds because the U.S. government presents less risk of default on its debt payments or obligations.
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Definition
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A bond is a security issued by federal, state and local governments and corporations. Unlike stocks, bonds don't represent any type of ownership. In exchange for buying the bond, a bond issuer pays the bondholder a set rate of interest, periodically throughout the year, for the term of the bond.
Maturity Dates
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Once the bond reaches its maturity date, the bond issuer must pay the bondholder the principal amount on the bond. Maturity dates on corporate bonds can be as short as five years or as long as 40 years, however, a 20-year Treasury bond has a maturity date of 20 years from the date of issue. Longer maturity dates lock in the bond interest rate for longer periods of time, which can be an advantage or a disadvantage depending on whether overall interest rates rise or fall.
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Issuer
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Any corporation that meets the Securities and Exchange Commission's standards for issuing bonds can do so. This includes long-term bonds with maturity dates between 20 and 40 years. Only the U.S. government issues U.S. Treasury bonds, including 20-year bonds.
Credit
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The credit of the U.S. government backs all treasury bonds. Meaning, the likelihood of the U.S. government defaulting on its debt to bondholders is as likely as the government going bankrupt. The credit of the corporation issuing the bond backs its bonds, so these bonds have an increased risk of defaulting on obligations over the U.S. government.
Return
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The return on a 20-year Treasury bond is generally lower than a corporate bond. Since corporate bonds carry more risk than Treasury bonds, corporate bond issuers compensate their investors by paying a higher interest rate. Since Treasury bonds carry relatively lower risk, their coupon rates are generally lower.
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References
- Photo Credit savings bonds image by judwick from Fotolia.com
