Bond

When you buy a bond, you’re lending money to a government or a corporation. In return, they pay you interest at a set rate for a set period. At the end of that period (called the maturity date), you get your original investment back.

For example, if you buy a Government of Canada bond with a 4% interest rate and a 5-year term, you’ll receive interest payments over those five years, and then get your principal back when the bond matures.

Types of bonds

Government bonds (federal or provincial) are generally considered lower risk because they’re backed by the government. Corporate bonds pay higher interest rates but carry more risk, since companies can default. Within Canada, you’ll often see references to Government of Canada bonds, provincial bonds, and investment-grade corporate bonds.

You can buy individual bonds, but most people get exposure through bond ETFs or bond mutual funds, which hold a diversified mix.

Why people hold bonds

Bonds tend to be less volatile than stocks. They don’t offer the same growth potential, but they provide steadier, more predictable returns. That’s why many investors include bonds in their portfolio to smooth out the ride, especially as they get closer to needing their money.

The tradeoff is straightforward: bonds give you more stability but less growth. A portfolio that’s 100% stocks will likely grow more over 30 years, but it will also have sharper ups and downs along the way. Bonds help take the edge off.

Example

Say you buy a Government of Canada bond with a face value of $10,000, a 3.5% coupon rate, and a 5-year term. You’d receive $350 per year in interest payments ($175 every six months). At the end of five years, you get your $10,000 back. Over the full term, you earn $1,750 in interest. That return is modest compared to stocks, but you know exactly what you’re getting from day one.