What is the primary difference between government bonds and corporate bonds?

The primary difference between government bonds and corporate bonds lies in the entities that issue them. Government bonds are issued by national governments, which can include a variety of debt instruments such as treasury bonds, notes, and bills. These bonds are backed by the government's ability to raise funds through taxation and other revenue, making them relatively low-risk investments.

On the other hand, corporate bonds are issued by companies to raise capital for various business activities, such as expanding operations or refinancing debt. The creditworthiness of corporate bonds is dependent on the financial health and performance of the issuing company, which introduces varying levels of risk depending on factors like the company's earnings, debt levels, and overall market conditions.

While options discussing returns, tax exemptions, and risk levels are relevant to the characteristics of these bonds, they do not encapsulate the fundamental differentiating factor between government and corporate bonds as accurately as the correct choice does. Understanding this key distinction is critical when assessing the nature of fixed-income investments and their respective risk profiles.