How to Buy Canadian Bonds
A bond is a fixed-income security that pays the principal, or face value, on maturity, and interest on a regular basis. Bonds are traded in the over-the-counter bond market, which is a closed trading system operated by investment dealers and banks. In Canada, bonds are issued by governments and corporations.
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Instructions
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Buy a Canada Savings Bond. These are bonds issued by the Government of Canada every year. They offer a low interest rate, but you can buy them for as little as $100, and redeem them at anytime. You can buy them directly from the government, through your bank or brokerage, or through a payroll savings plan.
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Buy a government bond. Federal and provincial governments, and crown agencies such as the Canada Mortgage Housing Corporation (CMHC), issue bonds with maturities ranging from one to 30 years. Federal and provincial government bonds are liquid, meaning they can be traded easily. They are also safe investments because the principal and interest payments are guaranteed by the governments. You can buy them from your bank or brokerage. They are usually sold in $1,000 increments, although financial institutions may require a higher initial purchase amount. The interest rates are posted either on the issuer's website or in the business press or both.
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Buy a corporate bond. Businesses raise money through different means such as loans from banks, stock offerings and bonds. Unlike the federal or provincial government bonds, you cannot assume that all corporate bonds are equally safe and liquid. Each bond may have a different credit rating, which is a way of assessing the risk of the bond issuer. You should review this rating and the financial statements of the corporation before buying its bonds.
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Buy a money market product. These products include Treasury bills, or T-bills, issued by the federal and provincial government, bankers' acceptances issued by financial institutions, and commercial paper issued by corporations. These products are for shorter terms than regular bonds, with maturities ranging from a month to a year. They are liquid instruments, and can be bought from your bank or brokerage. T-bills are considered the safest money market product because they are backed by the federal or provincial governments.
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Buy a mutual fund. There are dozens of mutual funds in Canada that invest in bonds and money market products. You can buy them directly from the mutual fund company, your bank or brokerage. However, you should always check the mutual fund prospectus to determine the quality and risk profile of the fund investments.
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Tips & Warnings
Bond prices are expressed on a base of 100. For example, a bond trading at 100 is said to be trading at face value, or par; a bond trading at 95 is trading at a discount, or below par; and a bond trading at 105 is trading at a premium, or above par. Bond prices fall when interest rates rise, and rise when interest rates fall.
Municipal government bonds, which are issued in maturities from a few months to 30 years, are not necessarily backed by the provincial government in which the municipality is domiciled. This means that they would have a lower credit rating than other government bonds.
Bonds can be held in both tax-sheltered and taxable accounts in Canada. Interest payments from bonds held in taxable accounts are considered regular income for taxation purposes. The proceeds from the sale of bonds are treated as capital gains or losses for taxation purposes.
Bonds can also be sold by packaging their component parts, the principal and the interest payments, separately. These bonds are known as zero-coupon or strip bonds.
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