Page 198 - A Canuck's Guide to Financial Literacy 2020

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Bonds

In the world of finance, bonds are loans made to large corporations, cities, and
governments. These bond issuers owe the holders of the bond a debt obligation and
depending on the term of the bond, are obligated to pay them interest which is known as the
coupon payment. Bonds pay at fixed intervals, usually semi-annually, unless stated
otherwise. At maturity, the bondholder will receive the principal payment + interest.
Bonds are considered a fixed income investment.

Types of Bonds

Federal Bonds

▪ Federal Bonds are one of the highest rated bonds in terms of credit quality as they’re
backed by the federal government. The Federal Government and Government of
Canada Crown Corporations issue debt obligations to support government spending,
finance projects or day to day operations. These bonds are considered low risk
investments and can have terms of one to 30 years.

Provincial Bonds
▪ Provincial Bonds are issued by Canada’s Provincial Governments. These bonds are
of high quality, have better rates than similar federal bonds and can have a term of up
to 30 years. These bonds account for about 20% of the bond market. Funds collected
by the provincial government are used to fund deficits that may arise from public
spending or other expenditures.
▪ Safety – Provincial bonds are direct obligation bonds of the government and are
secured by the government’s ability to collect taxes
▪ Income – As per other bonds, these bonds pay interest payments twice a year
▪ Liquidity – Bonds can be sold at its market value on any business day
▪ Price Changes – While the interest portion of the bond will stay the same, the
value of your bond will change daily in accordance to supply and demand and
interest rates.

Corporate Bonds
▪ Corporate bonds are a certificate of debt secured by a physical asset on which the
corporation promises to pay the holder a stated rate of interest over the life of the
bond. At maturity, the investor would receive the principal. Corporate bonds are riskier
than government bonds and therefore have a higher interest rate.

Corporate Debentures

▪ Corporate Debentures are similar to a bond except that they are not secured by any
specific assets. They’re backed only by the general credit quality of the issuer.