Corporate Bonds vs Govt Bonds: Case of Ksh1M Investment

In recent months, the bond market has seen a significant rise in corporate institutions entering the market to raise capital through bond issuances.

Some of these companies include Safaricom, East African Breweries Limited, I&M Bank, and Kenya Mortgage Refinancing Company (KMRC), among others.

This has given Kenyans more opportunities to invest in the bond market, which has mostly been dominated by Treasury Bonds.

In this article, we shall highlight both bonds and look at a practical case study of Ksh1 million invested in each option over 10 years, using the average interest rates recently offered in the market.

Also Read: All You Need to Know About the Sanlam Allianz Balanced Fund With a 32.3% Return

Case Study 1: Ksh1 Million in a Government Bond

Recent long-term government bonds offered by the Central Bank of Kenya (CBK) have had an average interest rate of 13% annually, with a withholding tax of 15% on the interest earned.

If an investor puts Ksh1 million into a 10-year Treasury bond at a 13% coupon rate, the gross annual interest earned will be Ksh130,000. If you take away the tax of Ksh19,500, the annual net income will be:

Ksh130,000 - Ksh19,500 = Ksh110,500.

Since Treasury bonds usually pay interest twice a year, an investor will be getting Ksh55,250 every six months.

The total interest earned over the 10 years will be about Ksh1,105,000.

Case Study 2: Ksh1 Million in a Corporate Bond

The average interest rates for corporate bond issuances in recent months have averaged around 12% annually. (EABL - 11.8%, I&M Bank - 12.20%, and KMRC - 12.2%)

If an investor places Ksh1 million into a 10-year corporate bond at a 12% interest rate, the gross annual interest earned is Ksh120,000.

Most corporate bonds attract a withholding tax rate of 15%, although some green bonds offered by companies, as was the case with Safaricom last year, are tax-free.

In a taxed bond, the new annual interest earned will be: Ksh120,000 - Ksh18,000 = Ksh102,000.

Depending on the bond structure, payments may be made semi-annually or annually.

In the end, the total net interest earned over the 10 years will be Ksh1,020,000.

Read more: Can Bonds Pay Your Rent? How Much Investment You Need to Earn Between Ksh15K & Ksh30K Per Month

Comparison of Benefits of Investing in Government and Corporate Bonds

Govt Bonds 

Lower risks: Government bonds are generally viewed as one of the safest investments in Kenya because they are backed by the state.

Predictable returns: Investors know exactly how much they will earn and when they will receive payments.

Stable passive income: Treasury bonds provide steady income without the need to actively manage a business or property.

Better liquidity: Government securities are more actively traded through the Nairobi Securities Exchange compared to corporate bonds.

Corporate Bonds 

Predictable cash flow: Corporate bonds provide regular income through scheduled interest payments.

‍Portfolio diversification: Investors gain exposure to different sectors such as banking, manufacturing, and telecommunications.

‍Exposure to private sector growth: Investors indirectly participate in the growth and expansion of large companies.

Also Read: Advantages of Investing in Treasury Bonds

Comparison of Risks of Investing in Government and Corporate Bonds

Govt Bonds

Inflation risk: If inflation rises faster than bond returns, the purchasing power of the income declines.

‍Interest rate risk: If market interest rates rise further, newly issued bonds may offer better returns than existing ones.

‍Long Investment: A 10-year bond ties up capital for a long period unless sold before maturity.

Corporate Bonds

Default risk: The biggest concern for investors is whether the issuing company can fully repay investors. Unlike government bonds, corporate bond performance depends heavily on the company’s financial health.

Business risk: Corporate performance can be affected by economic slowdowns, industry disruptions or poor management decisions.

‍Lower liquidity: Corporate bonds in Kenya are generally less actively traded, making them harder to sell quickly.

Both corporate and government bonds offer investors a way to earn relatively stable returns over time. In the current market, government bonds are offering slightly higher average returns than corporate bonds while still carrying lower risk.

Ultimately, the decision on investing in one comes down to what matters most to the investor: higher security or broader exposure to private sector opportunities.

Notably, there are usually tax-free bonds, such as infrastructure bonds used to undertake development projects and green bonds, which are used to undertake environmentally friendly projects.