What are bonds?
A bond is a type of investment where you lend money to a company, government or organization that needs to raise funds. In return, the bond issuer agrees to pay back the original amount borrowed at the end of the term, along with interest payments along the way. Bonds typically offer more predictable income than some other investments, but generally have lower return potential than higher-risk investments like stocks.
Bonds can be used to add stability and diversification to your investment portfolio. They may provide a steady stream of income and can help reduce the impact of market ups and downs from other investments. There are many types of bonds, including government, provincial, municipal and corporate bonds. The right option depends on your goals, timeline and comfort with risk. A Conexus advisor can help you understand which investments may fit your overall plan.
Why choose bonds?
Liquidity
Bonds can be easily bought and sold.
Generally, bonds are more liquid (how easily an investment can be turned into cash) than some other investments, like mutual funds, because an investor can easily buy or sell bonds at prevailing market prices.
Steady returns
A predictable stream of returns over time.
Bonds can provide a steady stream of returns over the life of the bond, which can help you meet your financial goals with a high degree of predictability.
Less risk
Bonds are typically less volatile than stocks.
Bonds are typically less volatile and less risky than stocks. They offer a higher level of capital preservation (the original value of your investment or sum of money), making them a suitable choice for the risk-averse looking to safeguard their principal investment.
How does it work?
When you purchase a bond, you are lending money to a company, government or organization for a set period of time. In return, the bond issuer makes regular interest payments and repays the original amount invested when the bond reaches its maturity date.
Bonds can also be bought and sold before they mature. Like other investments, the value of a bond can change based on factors such as interest rates, market conditions and the financial strength of the issuer. If you hold a bond until maturity, you’ll receive the agreed-upon interest payments and the face value of the bond, assuming the issuer meets its obligations. If you sell before maturity, the price you receive may be higher or lower than the original amount invested.
Unlike stocks, bonds do not provide ownership in a company. Instead, they represent a loan to the issuer. Bonds are generally considered less risky than stocks because their returns are not tied directly to company growth, but they still carry risks, including the possibility that the issuer may not be able to make payments. The right investment depends on your goals, timeline and comfort with risk.
Is this right for you?
Right for you if:
- You're a conservative investor. Bonds are considered a lower risk compared to an investment product like stocks. If you're someone who wants to prioritize your original value of investment and aren't comfortable with high volatility in the stock market, then you may find bonds appealing.
- You're planning retirement. Bonds can play a role in your retirement planning by providing a reliable source of income. They can be used to diversify your portfolio that balances growth and income.
- You want to diversify your portfolio. Bonds can be a valuable asset when it comes to a diversified investment portfolio. If you're looking to spread risk across various products, bonds can help you achieve balance.
May not be right for you if you:
- You're looking to maximize high returns. If growth is your priority over capital preservation, bonds may offer more modest returns than other products.
- Have a preference for growth. If you're focused on growing your investment portfolio and are less concerned about generating income, you may want to opt for products with the potential for higher capital appreciation, such as stocks.
Tools to help you reach your goals.
Common questions.
Here’s what people ask us the most.
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Bonds typically earn money through regular interest payments made by the issuer. If you hold a bond until maturity, you’ll receive the agreed-upon interest payments and the original amount invested, assuming the issuer meets its obligations. You may also be able to sell a bond before maturity, but its value may be higher or lower depending on market conditions.
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The Bank of Canada sets the overnight lending rate, which influences bond prices — when rates rise, existing bond prices generally fall, and vice versa.
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Government bonds are generally safer since the issuer is unlikely to default. Corporate bonds carry more risk, with higher rates to compensate. All bonds carry interest rate and inflation risk.
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Yes. Bonds can be held in eligible investment accounts, including registered accounts such as RRSPs and TFSAs. The right account depends on your goals, investment strategy and tax considerations.
We're here to help.
Not sure which investment option is right for you? Our advisors can help you understand your choices, explore different options and create a plan that fits your goals and financial situation.
