Bond

A loan with the roles reversed

With a bond, you are the lender. A government or corporation borrows your money for a set number of years, pays you interest along the way, and returns the principal at the end. The interest payments are called coupons, fixed when the bond is issued and paid twice a year in Canada. The amount repaid at maturity is the face value, typically in multiples of $1,000.

Because the cash flows are written into a contract, a bond is far more predictable than a stock. Hold it to maturity and you know exactly what you will receive and when. The only real question is whether the issuer stays solvent, which is why the identity of the borrower matters so much. That predictability is what makes bonds the anchor of the conservative side of most portfolios.

Maturities run from 1 year out to 30 years and beyond; anything shorter lives in the separate world of the treasury bill. Short bonds behave almost like cash, long bonds swing hard when rates move, and many investors split the difference by spreading purchases across maturities in a bond ladder, so that a bond matures, ready to be reinvested or spent, at regular intervals.

Who issues bonds in Canada

Canadian bond issuers line up on a spectrum from rock solid to speculative, and yields rise as you move along it:

• Government of Canada bonds are the benchmark for everything. They are the safest and most heavily traded securities in the country, every other Canadian bond is priced as a spread above them, and the 5-year GoC yield is the anchor that fixed-rate mortgage pricing keys off.
• Provincial bonds, with Ontario and Québec as the largest issuers, pay a little more than Ottawa to compensate for slightly higher risk and thinner trading.
• Municipal bonds come from cities and regional authorities, a smaller and less liquid market that pays a bit more than provincials.
• Investment-grade corporate bonds, from banks, utilities, railways and telecoms, pay more still in exchange for taking on genuine credit risk.
• High-yield bonds come from weaker borrowers and pay the most, because for these issuers default is a real possibility rather than a footnote.

How bonds are actually bought

Individual bonds do not trade on an exchange. Your brokerage sells them out of a dealer inventory: you see a price, you accept it or not, and the dealer's compensation is a markup embedded in that price rather than a visible commission. The markup is hard to see and proportionally heavier on small orders, which is the honest reason individual bonds tend to suit larger portfolios.

For most Canadians, the practical route is a bond ETF. One purchase buys hundreds of bonds, trades on the exchange like a stock, and handles all the coupon reinvestment for a modest management fee. The trade-off is that a bond ETF never matures: its value keeps fluctuating with rates indefinitely instead of converging to a known payout on a known date.

The retail substitute is the GIC. At typical retail sizes, GICs frequently pay as much as or more than bonds of the same term, they carry CDIC insurance up to $100,000 per category (as of July 2026), and there is no markup to worry about. What you give up is flexibility: most GICs cannot be sold before maturity, and a GIC's value never rises when interest rates fall, while a bond's does. For money with a known date attached, that is often a fair trade; for money that might need to move, it is not.

The price and rate see-saw

A bond's coupon is frozen, but market interest rates are not. When rates rise, newly issued bonds pay more, so existing bonds with smaller coupons must sell at a lower price to compete. When rates fall, older bonds with rich coupons become prized and their prices climb. Price and yield always move in opposite directions.

The single number that summarizes the whole trade is the yield to maturity: the all-in annual return implied by today's price if you hold to the end. That article covers the math. The thing to internalize here is simpler: a bond bought and held to maturity delivers exactly what it promised, whatever its price does in between.

The three risks

Bonds are safer than stocks, not risk-free. Three risks matter:

• Default risk: the issuer fails to pay. Government of Canada bonds are considered essentially free of it; for everyone else, credit ratings (AAA down through the BBB investment-grade floor, then into high yield) grade the danger in a couple of letters.
• Interest-rate risk: rates rise and your bond's price falls. Longer bonds swing harder, and bond duration measures exactly how hard.
• Inflation risk: a bond's dollars are fixed, so unexpected inflation quietly eats the purchasing power of every coupon and of the principal itself. This is the risk that actually hurts holders of "safe" bonds most often.

Bonds vs. GICs vs. bond ETFs

The three main ways Canadians hold fixed income solve different problems:

Where to hold bonds

Bond interest is fully taxable at your marginal rate, with none of the break given to capital gains or Canadian dividends. Bonds therefore belong in registered accounts, an RRSP, TFSA or similar, whenever there is room. Buying a bond between coupon dates adds one taxable wrinkle in non-registered accounts, covered in the tax note of the accrued interest article.