What is Bond

A bond is debt instrument which guarantees to repay the principal of the loan plus interest to the bondholder. Bonds are considered to be long-term debt and have to be paid back on their maturity date. Usually bonds have fixed interest rate, which is paid to the bondholder during the term of the bond.

Bonds can be issued by both governments and corporations. When you buy bonds you are in effect lending money to the bond issuer, who agrees to repay the loan in the future and to pay interest during the life of the bond.

The Canadian Government offers the Canada Saving Bond, the Canada Premium Bond and the Canada Investment Bond for example. You can purchase the Canada Saving Bonds online or from your bank. The Ontario Government sells the Ontario Savings Bonds. The principal and interest of the Ontario Savings Bonds are 100% backed by the Ontario Government.

There are different types of bonds like Fixed Rate Bonds, Inflation Linked Bonds (their principal is indexed for inflation), the so called junk bonds, which have low credit rating and usually pay higher interest, and many other.

Usually bonds are bought and sold by Canadian banks, Canadian Pension Funds and other financial institutions. Canadian individual investors can invest in bonds by holding them directly or by owning bond funds.

Bond prices fluctuate depending on the interest rates and the credit rating of the bond issuers. Bonds are considered a relatively safe investment, but bond investors can lose part or all of their money invested in corporate bonds, if the corporation that issued the bonds goes bankrupt.

As with any other investment always consider carefully every bond, before investing in it.

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