A bond is the simplest investment there is: you lend money, you are paid interest, and you get your money back on a set date. This module walks through the contract, who borrows, how a bond differs from the other “safe” places to keep money, and what bonds are for.
When you buy a bond, you are lending money to whoever issued it. In return the issuer signs a contract, and every bond in the world comes down to the same three terms:
Example. You buy $10,000 of face value of a five-year bond with a 4% coupon, paid twice a year. You receive $10,000 × 4% = $400 a year, as two payments of $200. After five years you have collected ten payments, $2,000 in total, and the issuer pays back your $10,000.
Anyone who needs to raise money for a long time can issue bonds. In practice, almost all bonds come from four kinds of borrower.
| Issuer | Canada | United States | Risk of not being paid |
|---|---|---|---|
| National government | Government of Canada bonds and treasury bills | Treasury bills, notes and bonds | Lowest |
| Provinces and states | Provincial bonds (Ontario, Quebec, BC and the rest) | State bonds, part of the “muni” market | Low |
| Cities and agencies | Municipal bonds, Canada Mortgage Bonds | Municipal bonds, agency bonds | Low to moderate |
| Companies | Corporate bonds from banks, utilities, pipelines, telecoms | Corporate bonds | Varies widely |
The closer a borrower is to the government that issues the currency, the safer the loan and the lower the interest rate it has to offer. A company has to pay more than the Government of Canada to borrow for the same length of time, because lenders want to be paid for the chance that it runs into trouble. That extra interest is called the credit spread, and Module 4 shows how to measure it.
Canada is unusual in one way: the provinces borrow a great deal, and Ontario is one of the largest sub-national borrowers in the world. Provincial bonds make up a large share of a broad Canadian bond fund, so you probably own some already.
Bonds often get lumped in with every other “safe” place to keep money. They are not the same thing, and the differences matter.
| Savings account | GIC | Bond | Stock | |
|---|---|---|---|---|
| What it is | A bank deposit | A bank deposit for a fixed term | A loan you can sell to someone else | A share of ownership in a company |
| Does the price change? | No | No | Yes, every day | Yes, often a lot |
| Can you get out early? | Any time | Usually not, unless it is cashable | Yes, by selling at today’s price | Yes, by selling at today’s price |
| Deposit insurance? | Yes, within limits | Yes, within limits | No | No |
| If the issuer fails | Insurance pays, within limits | Insurance pays, within limits | Bondholders are paid before shareholders, often only in part | Shareholders are paid last, often nothing |
| What you earn | A variable rate | A fixed rate | A fixed coupon, plus or minus price changes if you sell | Dividends and growth, with no promise |
Two rows deserve a closer look.
A bond’s price moves; a GIC’s does not. A GIC is a deposit, so its value is always what you put in plus interest. A bond is a security that trades. If you hold it to maturity, you get the face value back no matter what happened along the way. If you sell early, you get whatever buyers will pay that day, which can be more or less than you paid. Module 2 explains why.
Deposit insurance covers deposits, not bonds. In Canada, the Canada Deposit Insurance Corporation (CDIC) covers eligible deposits at member institutions, including GICs, up to $100,000 per insured category. Credit unions are covered by provincial insurers instead. In the US, the FDIC plays the same role. A bond has no such guarantee. Its safety is only as good as the borrower, which is why most people who want safety buy government bonds or high-quality bond funds. Module 7 covers GICs and deposit insurance in detail.
Over long periods, stocks have earned more than bonds. So why hold bonds at all? Because bonds do jobs that stocks cannot.
Income you can plan around. A bond’s payments are set out in advance. If you know you will need money on a certain date, such as a down payment in three years or living costs in retirement, a high-quality bond or GIC that matures around then is about as close as investing gets to a promise.
A cushion when stocks fall. Stocks can lose a third of their value or more in a bad year. The bond part of a portfolio usually falls much less, and high-quality government bonds have often risen when stocks crashed, as investors rushed to safety.
Example. A portfolio holds 60% stocks and 40% bonds. In a year when stocks fall 30% and bonds are flat, the portfolio falls 60% × 30% = 18%, instead of 30%. That gap is what lets many people stay invested instead of selling at the bottom.
The cushion is not guaranteed. In 2022 stocks and bonds fell together, because interest rates rose quickly and, as Module 2 explains, rising rates push bond prices down. Module 3 explains exactly how much a bond can fall and how to choose bonds that fall less.
How much of your portfolio to keep in bonds depends mostly on when you will need the money and how much of a fall you can live with. The ETF Investing course covers that choice in Module 4: Asset Allocation.
Educational purposes only; not financial advice. Any bonds, funds, tickers, rates and figures are illustrative examples, not recommendations. Interest rates, deposit-insurance limits and tax rules change, so confirm current details with the issuer, CDIC and your tax authority. Worked examples are not forecasts. Written by Elizabeta Dimoska. Always do your own research and consult a licensed advisor.