Investing In Corporate Bonds vs Government and Muni Bonds
Investing in corporate bonds versus government bonds and municipal bonds is a topic that many investors struggle with. Both types of bonds have benefits and drawbacks, and each may be right for some investors but completely wrong for others. All bonds are rated according to the credit rating of the company, government entity, or municipal entity that is issuing the bond. High yield corporate bond funds and other corporate offerings will typically offer a higher coupon rate for the bond while municipal or government bonds usually have a lower coupon rate. This is because the risk and potential reward are linked when you choose to invest. Bonds from companies have a higher risk of default than those offered by governments and municipal entities.
One drawback with investing in corporate bonds is that these bonds are usually taxable and do not offer tax advantages. Many municipal bonds and those from government entities provide tax free status for city, state, or federal taxes on the gains realized. Some bonds may be exempt from two or even all three types of taxes and these tax advantages can benefit high income earners significantly. Whether
short term corporate bonds or long term choices are chosen the risk involved may not be acceptable for some capital. If you are close to retirement and you are using investment capital intended to help you retire then you may be less willing to take the additional risks and may choose to stick with munis and government debt securities. If you are in your 20s or 30s then the additional gains may be worth the risk, because you can make up any losses over time.
Investing in corporate bonds can involve additional regulations or laws if the bonds chosen are offered by foreign or International companies. This is also true of government and municipal bonds as well though. If the company or entity that issues the bond is located in a country other than the USA then there may be a different currency used and market regulations may be different from those in the US. A corporate bonds list may be difficult to research if the company is outside of America because of a difference in language and research resources.
For many investors the act of investing in corporate bonds allows a higher possible return than what municipal or government bonds may offer, and this fits with the investment goals and strategies. Other investors choose munis and government debt securities for the stability and relative safety that is offered with these choices. Short and long term corporate bonds should make up a portion of any investment portfolio but many investors shy away from the higher risks. A diverse portfolio should include all three types of bonds for the largest degree of diversity and risk protection. When you compare the various bond types you will have to use the taxable equivalent yield to compare corporate offerings against municipal and government options so that an accurate comparison can be performed.