Investing in bonds in Canada offers a stable, reliable way to grow your wealth over time, especially if you’re looking for a low-risk investment compared to stocks. For many new investors, understanding bonds, the types available, and how to buy them can seem complicated. This article will walk you through everything you need to know about buying bonds in Canada, ensuring you feel confident in adding them to your investment portfolio.
What Are Bonds?
Bonds are debt securities issued by entities like governments, corporations, or municipalities. When you buy a bond, you are essentially lending money to the issuer in exchange for regular interest payments (also called coupons) over a predetermined period, known as the term. At the end of the term, the issuer repays the bond’s face value (principal). Bonds are often categorized as fixed-income investments because they typically provide predictable income streams.
Key Characteristics of Bonds:
- Issuer: Who is borrowing your money (e.g., government, corporation).
- Coupon Rate: The interest rate paid to the bondholder.
- Term to Maturity: The duration of the bond, or how long until the issuer repays the principal.
- Face Value (Principal): The amount you originally invest in the bond.
Why Invest in Bonds?
Bonds are popular among investors because they provide steady returns and offer lower risk than stocks. Bonds are particularly attractive to conservative investors or those looking to diversify their portfolios.
Benefits of Investing in Bonds:
- Predictable Income: Regular interest payments provide a steady stream of income.
- Safety: Bonds, especially government bonds, are generally safer than stocks.
- Portfolio Diversification: Bonds help balance the risks of more volatile investments like stocks.
- Capital Preservation: Bonds tend to hold their value over time, making them a good option for capital preservation.
A well-diversified investment portfolio often includes a combination of bonds and stocks to balance the risks and rewards of market fluctuations.
Types of Bonds Available in Canada
Canada offers a variety of bonds to meet different investment needs. Let’s look at the key types of bonds available to Canadian investors.
| Type of Bond | Issuer | Risk Level | Key Feature |
|---|---|---|---|
| Government Bonds | Federal, Provincial Governments | Low | Backed by the government, low default risk. |
| Corporate Bonds | Canadian Corporations | Medium to High | Higher interest rates but higher risk. |
| Municipal Bonds | Local Municipal Governments | Low to Medium | Often tax-exempt, low default risk. |
| Savings Bonds | Government of Canada | Low | Easy to buy, redeemable anytime. |
| Real Return Bonds (RRBs) | Government of Canada | Low | Inflation-protected, real purchasing power. |
| High-Yield Bonds (Junk Bonds) | Riskier Corporations | High | High interest rates, but higher default risk. |
How to Buy Bonds in Canada
1. Buying Individual Bonds
If you want to buy individual bonds, you have a few options:
Direct from the Government
Federal bonds, such as Canada Savings Bonds and Canada Premium Bonds, are issued directly by the government. You can purchase these through your bank, credit union, or the Government of Canada’s website (although note that the Canada Savings Bond program was discontinued in 2017). Provincial governments also offer their own bonds.
Through a Broker
You can buy bonds issued by corporations or other entities through a brokerage account. Brokers will have access to various types of bonds, including corporate bonds, municipal bonds, and government bonds.
Steps to Buy Individual Bonds:
- Open a brokerage account (with platforms like Questrade, RBC Direct Investing, or Wealthsimple).
- Research the type of bond you wish to purchase.
- Place your order via your broker.
- Hold until maturity or sell early on the secondary market.
| Platform | Commission Fee | Bond Selection | Ease of Use |
|---|---|---|---|
| Questrade | $5 – $9.95 | Extensive corporate/government options | Beginner-Friendly |
| RBC Direct Investing | $0 – $9.95 | Wide range of bonds | Advanced Features |
| Wealthsimple | Commission-Free | Limited | Best for beginners |
2. Buying Bond Mutual Funds
A bond mutual fund pools money from many investors to buy a diversified portfolio of bonds. Fund managers select bonds based on factors like duration, yield, and credit quality. Buying a bond mutual fund can be a good way to achieve diversification with a smaller initial investment.
Benefits:
- Diversification: Exposure to a wide variety of bonds.
- Professional Management: Experienced managers handle the bond selection.
- Liquidity: Easier to buy and sell compared to individual bonds.
Steps to buy a bond mutual fund:
- Open an investment account.
- Choose a fund based on your investment goals.
- Make your purchase through a brokerage platform or mutual fund provider.
Popular Bond Mutual Funds in Canada:
- RBC Bond Fund
- TD Canadian Bond Fund
- CIBC Canadian Bond Fund
3. Buying Bond ETFs
Bond ETFs (Exchange-Traded Funds) are collections of bonds that trade on stock exchanges. They offer the benefit of diversification like bond mutual funds but can be bought and sold just like stocks.
Advantages:
- Lower Costs: Bond ETFs typically have lower fees compared to mutual funds.
- Liquidity: Easily bought or sold during market hours.
- Diversification: Access to a portfolio of bonds.
Popular Canadian Bond ETFs:
- iShares Canadian Universe Bond Index ETF (XBB)
- BMO Aggregate Bond Index ETF (ZAG)
- Vanguard Canadian Aggregate Bond ETF (VAB)
| Bond Type | ETF Example | Management Fee |
|---|---|---|
| Government | iShares Canadian Government Bond ETF (XGB) | 0.39% |
| Corporate | iShares Canadian Corporate Bond ETF (XCB) | 0.33% |
4. Other Considerations When Buying Bonds
Interest Rate Risk
When interest rates rise, bond prices tend to fall. Long-term bonds are more susceptible to interest rate changes than short-term bonds.
Credit Risk
This is the risk that the bond issuer will default on interest payments or fail to return the principal. Government bonds tend to have lower credit risk, while corporate bonds can vary in risk depending on the issuer’s creditworthiness.
Inflation Risk
Inflation can erode the purchasing power of your bond returns. Real Return Bonds (RRBs) can help protect against inflation as their payments adjust according to inflation rates.
Liquidity
Not all bonds are easy to sell on the secondary market. If liquidity is important to you, ensure the bond you’re considering is widely traded.
Frequently Asked Questions (FAQs)
1. What is the minimum investment required to buy bonds in Canada?
Minimum investment requirements vary, but for individual bonds, you typically need at least $1,000. Mutual funds and ETFs may have lower entry points.
2. How are bonds taxed in Canada?
Bond interest income is taxed as regular income, while capital gains (if you sell bonds for a profit) are taxed at a lower rate.
3. Can I lose money on bonds?
While bonds are generally considered safer than stocks, they are not risk-free. You can lose money if the issuer defaults, or if you sell a bond before maturity for less than you paid.
4. Are bonds a good investment for retirement?
Yes, bonds are considered a conservative investment and can provide stable income during retirement.
5. Should I invest in bonds when interest rates are rising?
When interest rates rise, bond prices fall, so it may not be the best time to buy long-term bonds. Short-term bonds or bond ETFs might be a better option in a rising interest rate environment. Read more here
