How Does a Canadian Government Bond Work?
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Governments Raise Capital by Selling Bonds
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A bond is a certificate that a private party can purchase from a government or business that the seller promises to pay back over a set period of time. During the years the bond holder is waiting to be paid the full principle value, the issuer of the bond also makes periodic interest payments, usually biannually or annually. The purpose of a bond is for a large entity like a government to be able to raise capital, and quickly, if the need should arise. During difficult times, such as the world wars, the U.S. government drove hard to sell "war bonds" to raise money for military expenditures.
Canada Offers Different Types of Bonds
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One needs to be a Canadian citizen to buy Canadian bonds; you do not need to be a U.S. citizen to buy U.S. bonds. Canada offers savings bonds that can be cashed in at any time, so that one does not need to wait until a maturity date. Canada also has bonds that can be cashed in at each anniversary of the date the bond was purchased. Canada offers inflation adjusting and fixed rate bonds, as well as options of normal or compounding interest.
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Government Bonds Are Low Risk Investments
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Government bonds are an excellent investment in terms of stability. They are often considered risk-free assets, since a government has near unlimited ability to pay back a bond by simply by printing more money if it must. Of course, in investing, low risk implies low payoff, but that does not mean bonds are a bad investment. An annual payout of 5 percent or so is not going to turn any heads, but it is respectable, and there is no chance of losing money. The reason stocks are so popular is that they have potential for huge gains, but one is far more likely to lose money than achieve, say, a 50 percent return in 1 year. Adding a mix of bonds into a long term investment portfolio is a good idea to add some dependable income.
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