In the world of finance, bonds are loans made to large corporations, cities, and governments. There are thousand types of bonds and these bond issuers owe the holders of the bond a debt obligation. Depending on the term of the bond, they’re obligated to pay them interest which is known as the coupon payment. Bonds pay at fixed intervals, usually semi-annually, unless stated otherwise. At maturity, the bondholder will receive the principal payment + interest. Bonds are considered an fixed income investment.
Types of Bonds
Federal Bonds
- Federal Bonds are one of the highest rated bonds in terms of credit quality as they’re backed by the federal government. The Federal Government and Government of Canada Crown Corporations issue debt obligations to support government spending, finance projects or day to day operations. These types of bonds are considered low risk investments and can have terms of one to 30 years.
- Throughout the year, the federal government would hold auctions in order to sell their bonds. The creditworthy of a government would determine the success of their auctions. Various international credit rating agencies will provide ratings about each country. Ratings act like a credit score and bonds with AAA rating are usually considered safe.
Provincial Bonds
- Provincial Bonds are issued by Canada’s Provincial Governments. These bonds are of high quality, have better rates than similar federal bonds and can have a term of up to 30 years. These bonds account for about 20% of the bond market. Funds collected by the provincial government are used to fund deficits that may arise from public spending or other expenditures.
- Safety – Provincial bonds are direct obligation bonds of the government and are secured by the government’s ability to collect taxes
- Income – As per other bonds, these bonds pay interest payments twice a year
- Liquidity – Bonds can be sold at its market value on any business day
- Price Changes – While the interest portion of the bond will stay the same, the value of your bond will change daily in accordance to supply and demand and interest rates.
Corporate Bonds
- Corporate bonds is a certificate of debt secured by a physical asset on which the corporation promises to pay the holder a stated rate of interest over the life of the bond. At maturity, the investor would receive the principal. These types of bonds are riskier than government bonds and therefore have a higher interest rate.
Corporate Debentures
- Corporate Debentures are similar to a bond except that they are not secured by any specific assets. They’re backed only by the general credit quality of the issuer. Debentures have a higher level of risk and offer a higher rate of return than bonds with similar characteristics.
Zero-Coupon Bonds/Strip Bonds
- Zero Coupon Bond is exactly what the name states. The bond pays no interest payments which are known as coupons because the coupons are stripped and sold separately. Because the zero coupon bonds do not pay interest, they are sold at a discount. Upon maturity, the bond holders receive the face value of the bond as it gradually increases in value. They’re considered long term investments as they mature in ten or more years.
Foreign Bonds
- A foreign bond is an investment that is issued by a foreign entity in the local market’s currency. The foreign entity can be a government, municipality or a corporation. Foreign bonds tend to have higher risk than domestic bonds due to their exposure to interest rate risk and currency risk. Typical foreign bonds are mentioned below. These types of bonds are denominated in the local currency of that country.
- Yankee bonds (in the U.S)
- Rembrandt bonds (in the Netherlands)
- Samurai bonds (in Japan)
- Matador bonds (in Spain)
- Bulldog bonds (in the Uk)
- Maple Bonds (in Canada)
- Kangaroo Bond (in Australia)
