What you need to know about bonds
What is a bond?
A bond is a contract for a loan taken out by a major entity (often a government or corporation) that can be traded on the open market. The bond pays out regular interest until it reaches its maturity date, at which point it is paid back in full.
Benefits of bonds
Lower risk and reliable incomeMost types of bonds (with the exception of high-yield bonds) are issued by either governments or large, successful corporations. A bond will always fully and reliably pay out unless the issuer defaults, which is extremely rare for such institutions. This reliability is why bonds are considered fixed income.
Bonds can be purchased commission-free at QuestradeWe charge no commission above our listed price on the purchase of bonds. All that’s required is a minimum purchase of $5,000.
Bonds are present in many ETFs, which can also be purchased commission-freeThere are a number of ETFs available that contain either partially or fully composed of different bonds. These can be bought through any Questrade trading platform, just like any other ETF.
Different types of bonds
- Municipalities and provinces often issue bonds to pay for projects such as parks, libraries, or infrastructure such as roadwork
- Considered very low-risk, as governments are almost always able to pay back their debts
- Often have a lower yield due to the low risk
- Corporations often issue bonds to raise money to invest into their business
- Mostly issued by corporations with excellent credit ratings (lower credit scores are classified as high-yield bonds)
- Higher risk than government-issued bonds, but still issued by corporations with good credit ratings
- Higher yield than government-issued bonds to reflect the risk
- Strip bonds are by-products of bonds whose coupon payments have been ‘stripped’ off of the principal payment to be sold separately
- The interest payments are sold as coupon strips, which pay out regularly. These are the most common types of strips, and are often listed in our bonds bulletin as generic strips.
- The principal is sold as residual strips, which is bought at a discount and repaid in full when the bond matures, but does not pay out regular interest.
- Corporate bonds issued by companies with lower credit ratings
- The returns of high-yield bonds are higher due to the elevated risk
- Not technically bonds, GICs are often used to serve the same purpose
- GICs are ordered through the trade desk, just like bonds, and are listed on the Bond Bulletin.
- Similar to bonds in that they are low-risk investments
- GICs are like bonds that are insured by the government up to $100,000, and therefore have zero risk up to that point
- The lower returns on GICs reflect this lack of risk
- You can learn more about GICs here.
Stocks vs bonds
Bonds are fundamentally different from stocks in a few ways:
|Partial ownership of a company||A note that the company owes you money, plus interest|
|Often has partnership rights, including voting rights||Has no partnership rights, but has higher claim on the assets loaned|
|Can be held indefinitely; you own a stock until you decide to sell it||Has a limited term, at which point the principal amount is repaid with interest and the contract ends|
|Dividend payments are set by the company’s board of directors and is subject to change||Interest payments are known and often fixed; the company has no direct say in payments|
|Issued by public companies that meet the listing requirements of their exchanges||Issued by companies, municipalities, provincial governments, federal agencies, and other public institutions|
|Value has a risk of rising or dropping sharply depending on the market||Value remains the same as long as the company is in business|
How to get started trading bonds
View the Bonds bulletin
The Bonds bulletin gives you a detailed list of bonds, GICs, and other fixed income securities available to trade.
Place a bond trade
Call the trade desk at 1.866.980.9590 before 3:45pm and please have the following information ready: The bond’s CUSIP or security number, the issuer’s name, the maturity date, the coupon, and your order details.
Subscribe to the Bonds bulletin
For daily updates to the bond market, sign up for our bonds bulletin.
Open a Self-Directed account
Getting started is easy, and a new account can be set up in a matter of minutes. Just enter your information and transfer some funds into your account. Once your account is live and funded, you’re ready to trade.
Get answers to our frequently asked questions
Do I need to hold a bond until it matures?
Since bonds can be bought and sold on the market, you have the freedom to sell your bonds at any time for a fair rate. In fact, companies may often buy back their own bonds if their credit improves and they are able to re-issue at a more favorable interest rate.
Are bonds only issued by governments and major corporations?
Most commonly traded bonds are issued by governments or major corporations, but other bonds can be traded privately or through over the counter exchanges.
Are bonds safe from theft or fraud?
When bonds were first issued in the 1800s, they were physical pieces of paper with cut-away interest coupons attached, often with no record of ownership, which made theft difficult to track. Modern bonds are digital contracts that are recorded and tracked to protect you from theft and fraud.