Bonds & Fixed Income Basics

What it is

A bond is an IOU — you lend money to a government or a company, and in return they pay you interest and give your money back on a set date. “Fixed income” is the family name for investments built around this idea: predictable payments rather than the ups and downs of stocks.

How it works

1. You buy the bond (or a fund holding many bonds). Each bond has a face value (what you get back at the end), a coupon (the interest rate it pays), and a maturity date (when your principal comes back).
2. You collect interest, usually twice a year, until maturity.
3. At maturity, you get the face value back — assuming the issuer doesn’t default.
4. Bonds also trade on markets, so their price moves before maturity. Here’s the key relationship every investor must grasp: when interest rates rise, existing bond prices fall — because new bonds pay more, making older, lower-paying bonds less attractive, so their price drops until their effective yield matches. The reverse is also true.
5. Yield is simply the annual return relative to what you paid — the number that lets you compare bonds to each other and to GICs.

What it’s used for

Bonds are the stability and income portion of a portfolio — the counterweight to stocks. They’re for conservative investors, people nearing retirement, or anyone diversifying a stock-heavy portfolio. The trade-off is explicit: lower expected growth in exchange for calmer behaviour.

They’re NOT for investors chasing high growth, and in an era of higher inflation they’re not the wealth-building engine some older advice suggests.

Who provides it in Canada

• Government of Canada bonds — bought through brokerages; the federal government’s own IOUs.
• Provincial and municipal bonds — from provinces and cities, also via brokerages.
• Corporate bonds — issued by companies, paying higher interest to compensate for higher risk.
• Bond ETFs — iShares, Vanguard, and BMO all offer Canadian bond ETFs holding hundreds of bonds in one purchase, available through any brokerage.
• GICs as the simpler alternative — Guaranteed Investment Certificates from any bank or credit union: you lock in money for a fixed term at a guaranteed rate. No market, no price swings.

What it costs

• Bond ETF MERs: broad Canadian bond ETFs often charge around 0.10% per year or less — check the fund facts for the current figure.
• Individual bonds: no explicit MER, but dealers embed a spread (the gap between buy and sell prices) — effectively a hidden cost, larger on small trades.
• GICs: no direct fee at all — the posted rate is what you get.

Newcomer notes

• GICs are the simplest fixed-income product in Canada and a fine starting point: guaranteed rate, and protected by CDIC deposit insurance up to $100,000 per category per institution.
• Don’t go looking for Canada Savings Bonds — that federal program was discontinued in 2017.
• Bonds and bond ETFs can be held in a TFSA or RRSP like any other investment.
• If the seesaw relationship between rates and bond prices confuses you, you’re not alone — it’s the single most misunderstood concept in fixed income. Re-read section 2 until it clicks.

Risks / watch-outs

• Interest rate risk. When rates rise, bond values fall. Longer-term bonds swing more than short-term ones.
• Inflation risk. Fixed payments lose purchasing power if inflation runs hot — a 3% bond in a 4% inflation world is losing real value.
• Credit (default) risk. Companies — and rarely, governments — can fail to pay. Corporate bonds pay more precisely because this risk is real. Check credit ratings if buying individual corporate bonds.
• Bond funds can lose value. A bond fund has no maturity date guaranteeing your principal back — its price moves with the market daily.

FAQ

What’s the difference between a bond and a GIC? A GIC is a deposit product: guaranteed rate, locked term, CDIC-insured, no market price. A bond trades on markets, so its price moves before maturity, and only some bonds (none, directly) carry deposit insurance. GICs are simpler; bonds offer more flexibility and variety.

Why do bond prices fall when interest rates rise? Imagine you hold a bond paying 3% and new bonds pay 5%. Nobody will pay full price for yours — its price drops until its effective yield matches the new 5% bonds. It’s arithmetic, not opinion.

Are government bonds risk-free? Very low default risk for federal government bonds — but they still carry interest rate risk and inflation risk. “Safe from default” and “can’t lose value” are different things.

Can I hold bonds in my TFSA? Yes — bonds, bond ETFs, and GICs can all be held inside a TFSA, RRSP, or FHSA, where the interest is sheltered from tax. Interest earned outside registered accounts is fully taxable as income, which matters.

What is “yield” in plain English? The annual return you’d get at the current price, as a percentage. A bond paying $40 a year that costs $1,000 yields 4%. If its price drops to $800, the same $40 is now a 5% yield — which is exactly why prices and yields move in opposite directions.

Educational content only — not financial advice. Rules and promotions change; verify current details with the provider or CRA.