Now let's have a closer look at bonds and learn about some of the categories by which investors differentiate. Again, like in the case of debt, instruments in general, and loans. The main differentiator is who issues the bonds i.e., who is the borrower? And in the bond world, we distinguish between government bonds and corporate bonds.

First up, government bonds. These are the securities issued by governments to fund their day-to-day operations and to finance public projects.

You might have heard financial experts talking about government bonds being a safe haven asset or being practically credit risk free, meaning that an investor in these products, you don't need to fear the loss of capital due to the issuer not being able to pay back the borrowed money and or the interest. But you might also have heard about the significant amounts of debt that governments around the world have accumulated. And wonder why this can be considered to be a credit risk free. Here's the theory behind it.

It's because these bonds are backed by the full faith and credit of the issuing government, which has the power to tax. In addition, the government, or at least the country's central bank, can simply create more money and bail out the government, which makes a default of government debt, at least when issued in the country's own currency. Highly unlikely. However, it's important to note that in reality, governments have defaulted on their debt in the past, so not all government debt should automatically be treated equally. By way of an example, US Treasury bonds are seen as one of the safest investments they offer, therefore, lower yields reflecting their lower risk, but they provide a stable income and are excellent for preserving capital over time.

Now, let's pivot to corporate bonds. These are issued by companies to raise capital for expansion, to refinance existing debts or to fund acquisitions. Clearly the above mentioned mechanisms don't apply to corporates, so that when investors buy corporate bonds, they need to be aware that there is a credit risk, either risk of not getting your money back on time, in full, or even at all. So why invest in corporate bonds? Well, they offer higher yields than government bonds, which can be appealing for those seeking income or willing to take on moderate risk. The extra yield over a credit risk free government bond this investors demand to compensate for the added risk of lending to a corporation is called the credit spread. In summary, for investors, government bonds offer the peace of mind of stability, often serving as the bedrock for a diversified portfolio. Corporate bonds, on the other hand, spice things up with the potential for higher returns, but they require careful assessments of the issuing company's financial health.