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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Expert information and easy-to-follow advice for today's Canadian bond investors Bond Investing For Canadians For Dummies will show you how to invest in bonds in today's environment and strengthen and protect your investment portfolio. Bonds are a great choice for anyone looking to make a smart investment that will provide a steady income, and this book is a great choice for anyone ready to get started. With clear, jargon-free guidance on the best reasons to buy various types of bonds and what type of bonds to invest in, you'll be ready to minimize your investment risks by adding bonds to your portfolio. Let this book, which focuses on the Canadian bond market, teach you to wisely buy and sell your bonds by considering both risks and returns. Find out how to make the right bond investment for you. * Identify your investment goals and choose the best investment strategy for you * Use Canadian and international bonds to diversify your portfolio and build a safe income stream * Learn about the many different types of bonds, including Government of Canada Bonds and treasuries, municipal and provincial bonds, and agency bonds * Find out how to buy bonds at the right time, and when to sell * Understand the risks and returns on your bonds so you can meet your personal targets * Learn about the impact of Canadian taxes on bonds and other fixed-income investments Bond Investing For Canadians For Dummies is perfect for new and experienced investors who want to learn all the ins and outs of the bond market.
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Veröffentlichungsjahr: 2023
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Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: A Quick Guide to the Fixed-Income Universe
Chapter 1: Getting Interested in Bonds
Understanding What Makes a Bond a Bond
Why Hold Bonds? (Spoiler Alert: It Isn’t Necessarily to Make You Rich)
Introducing the Major Players in the Bond Market
Buying Solo or Buying in Bulk
Chapter 2: Building the Base for Your Portfolio
Focusing on Your Objectives
Making Your Savings and Investment Selections
Understanding Five Major Investment Principles
Chapter 3: A (Mostly) Heroic History of Bonds
Reviewing the Triumphs and Failures of Fixed-Income Investing
Looking Back Over a Long and (Mostly) Distinguished Past
Realizing How Crucial Bonds Are Today
Viewing Recent Developments, Largely for the Better
Chapter 4: Interest, Sweet Interest
Calculating Rates of Return — Tougher than Deciphering Babylonian
Conducting Three Levels of Research to Judge the Desirability of a Bond
Understanding (and Misunderstanding) the Concept of Yield
Appreciating Total Return (This Is What Matters Most!)
Measuring the Volatility of Your Bonds
Revisiting the Bonds of Babylonia
Part 2: Bonds of Many Distinct Flavors
Chapter 5: US Treasury and Government of Canada Bonds: As Safe as Safe Can Be
Investing with the Feds in Myriad Ways
Easing Your Fears of Default
Deciding Whether, When, and How to Invest in Government Bonds
Entering the Treasury and Canada Bond Marketplace
Chapter 6: Getting Down to Business: Corporate Bonds
Why Invest in These Sometimes Pains-in-the-Butt?
Getting Moody: The Crucial Credit Ratings
Special Considerations for Investing in Corporate Debt
Appreciating High Yield for What It Is
Chapter 7: Powerful As Well: Agency and Provincial Bonds
US Bond Issuers
Comparing and Contrasting Agency Bonds
Banking Your Money on Other People’s Mortgages
Considering Agencies for Your Portfolio
Considering Provincial Bonds for Your Portfolio
Using a Compass to Find Agency, Provincial, and Other Canadian Bonds
Chapter 8: Municipal Bonds on Offer in Canada and the US
Sizing up the Overall Muni Market
Surveying the Canadian Municipal Bond Market
Buying Munis Is Now Easier
Final Thoughts
Chapter 9: International Bonds and Other Seemingly Out-of-the-Ordinary Offerings
Traveling Abroad for Fixed Income
Dancing in the Flames: Derivatives and Default Bond Products
Evaluating Exchange-traded Notes
Final thoughts About Investing in Any Type of Foreign Bond
Part 3: Bonds as Portfolio Cement
Chapter 10: Return, Risk, and Reality
Searching, Searching, Searching for the Elusive Free Lunch
Appreciating Bonds’ Risk Characteristics
Reckoning on the Return You’ll Most Likely See
Finding Your Risk-Return Sweet Spot
Chapter 11: The Art and Science of Portfolio-Building
Mixing and Matching Your Various Investments
Appreciating Bonds’ Dual Role: Diversifier and Ultimate Safety Net
Recognizing Voodoo Science
Chapter 12: Slicing the Pie: How Much Should Be in Bonds?
Why the Bond Percentage Question Isn’t As Simple As Pie
Peering into the Future
Noticing the Many Shades of Gray in Your Portfolio
Making Sure That Your Portfolio Remains in Balance
Chapter 13: Making Your Preliminary Bond Choices
Reviewing the Rationale behind Bonds
Sizing Up Your Need for Fixed-Income Diversification
Weighing Diversification versus Complication
Finding the Perfect Bond Portfolio Fit
Part 4: A Manual for Smart Bond Shopping
Chapter 14: Planning Your Bond Transactions and How to Reduce Taxes
Discovering the Brave New World of Bonds
Deciding Whether to Go with Bond Funds or Individual Bonds
Is Now the Time to Buy Bonds?
General Tax Rules For Bonds
Taxation of Different Types of Fixed-Income Securities
Using Registered Savings Plans to Shelter or Defer Tax
Chapter 15: Diving (Carefully!) into the Individual Bond Marketplace
Navigating Today’s Bond Market
Dealing with Brokers and Other Financial Professionals
Doing It Yourself Online
Perfecting the Art of Laddering
Chapter 16: Choosing Canadian and US Bond Funds Wisely
Defining the Basic Kinds of Funds
Knowing What Matters Most in Choosing a Bond Fund of Any Sort
Our Picks for Some of the Best Bond Funds
Part 5: Bonds as Good Friends of Retirees
Chapter 17: Satisfying Your Need for Steady Cash
Reaping the Rewards of Your Investments
Investing in Short-Term Income-Generating Securities
Exploring Dividend and Income-Oriented Equities
Chapter 18: Ensuring Financial Security in the Golden Years
Looking Ahead to Many Years of Possible Portfolio Withdrawals
Knowing Where the Real Danger Lies: The Risk of Being Too Conservative
Tapping Out of Your Individual and Group Registered Plans
Making the Most Use of Canada’s Income Security Plans
Options to Unlock Your Home’s Income Potential
Part 6: The Part of Tens
Chapter 19: Ten Most Common Misconceptions about Bonds
A Bond “Selling for 100” Costs $100
Buying a Bond at a Discount Is Better Than Paying a Premium, Duh
A Bond Paying X% Today Will Pocket You X% Over the Life of the Bond
Rising Interest Rates Are Good (or Bad) for Bondholders
Certain Bonds, Such as Treasuries, Are Completely Safe
Bonds Are a Retiree’s Best Friend
Individual Bonds Are Usually a Better Deal than Bond Funds
Municipal Bonds Are Free of Taxation
A Discount Broker Sells Bonds Cheaper
The Big Risk in Bonds Is the Risk of the Issuer Defaulting
Chapter 20: Ten Mistakes Bond Investors Need to Avoid
Allowing the Broker to Churn You
Not Taking Advantage of CIRO’s and TRACE’s Tools and Resources
Choosing a Bond Fund Based on Short-Term Performance
Not Looking Closely Enough at a Bond Fund’s Expenses
Ignoring a Discount Broker to Buy Bonds
Counting Too Much on High-Yield Bonds
Paying Too Much Attention to the Yield Curve
Buying Bonds That Are Too Complicated
Ignoring Inflation and Taxation
Relying Too Heavily on Bonds in Retirement
Index
About the Author
Connect with Dummies
End User License Agreement
List of Tables
Chapter 6
TABLE 6-1 Bond Credit Quality Ratings
TABLE 6-2 Detailed Bond Credit Quality Ratings
Chapter 9
TABLE 9-1 Current Yield on Various Developed-World Government Bonds (ten-Year Ma...
Chapter 14
TABLE 14-1 Typical Income Received by Various Mutual Fund Types
Chapter 16
TABLE 16-1 Comparing Four Kinds of Common Bond Funds in Canada and the US
Chapter 18
TABLE 18-1 Your Chances of Living Well Beyond 65
List of Illustrations
Chapter 1
FIGURE 1-1: Bond interest rates over the past 65 years.
Chapter 3
FIGURE 3-1: Ten years of impressive growth in the fixed-income market.
Chapter 4
FIGURE 4-1: Nabu-sar-ashesu, bond issuer; Nabu-usabsi, bond buyer; Lila-Ir-lend...
Chapter 5
FIGURE 5-1 Example 1 of Canada Bond Quotations.
FIGURE 5-2 Example 2 of Canada Bond Quotations.
FIGURE 5-3 IIROC’s bond look-up tool.
Chapter 7
FIGURE 7-1: The three big agencies when it comes to issuing mortgage-backed sec...
FIGURE 7-2: The four GSEs that issue the most non-mortgage-backed bonds.
FIGURE 7-3: CMHC Operating Performance.
FIGURE 7-4: IIROC’s bond look-up tool.
Chapter 9
FIGURE 9-1: The relative returns of US versus foreign (developed nation) bonds....
FIGURE 9-2: The relative returns of US versus?foreign (developed nation) bonds....
Chapter 10
FIGURE 10-1: Where bond risk falls in the spectrum of investments.
FIGURE 10-2: Historical before-tax returns on $1,000 invested in stock markets ...
Chapter 11
FIGURE 11-1: Investments A and B each offer high returns and high volatility.
FIGURE 11-2: The ideal portfolio: The price (represented by the dotted line) ri...
Chapter 12
FIGURE 12-1: The ratio in the following chart divides the S&P 500 by a Total Re...
FIGURE 12-2: The best and worst years for stocks and bonds since the Great Depr...
FIGURE 12-3: A fairly aggressive portfolio allocation for Jean and Raymond.
FIGURE 12-4: A more conservative portfolio allocation for Kay.
FIGURE 12-5: An aggressive portfolio allocation for Juan.
FIGURE 12-6: A balancing act for Miriam.
Chapter 13
FIGURE 13-1: Recommended bond allocation for Jean and Raymond.
FIGURE 13-2: Recommended bond allocation for Kay.
FIGURE 13-3: Recommended bond allocation for Juan.
FIGURE 13-4: Recommended bond allocation for Miriam.
Chapter 15
FIGURE 15-1: IIROC Dealer Page.
FIGURE 15-2: IIROC Members.
FIGURE 15-3: Canadian Securities Administrators (CSA) Member Search Tool.
FIGURE 15-4: OSFI National Dealer Search Tool.
FIGURE 15-5: A typical bond ladder.
Chapter 16
FIGURE 16-1 FTSE Russell Canada Fixed Income and Indexes Page.
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Index
About the Author
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Bond Investing For Canadians For Dummies®
Published by
Wiley Publishing, Inc.
111 River St.
Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2024 by Wiley Publishing, Inc., Indianapolis, Indiana
Published by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing, Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online at http://www.wiley.com/go/permissions.
Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book.
LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHORS HAVE USED THEIR BEST EFFORTS IN PREPARING THIS WORK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES REPRESENTATIVES, WRITTEN SALES MATERIALS OR PROMOTIONAL STATEMENTS FOR THIS WORK. THE FACT THAT AN ORGANIZATION, WEBSITE, OR PRODUCT IS REFERRED TO IN THIS WORK AS A CITATION AND/OR POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE PUBLISHER AND AUTHORS ENDORSE THE INFORMATION OR SERVICES THE ORGANIZATION, WEBSITE, OR PRODUCT MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING PROFESSIONAL SERVICES. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION. YOU SHOULD CONSULT WITH A SPECIALIST WHERE APPROPRIATE. FURTHER, READERS SHOULD BE AWARE THAT WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. NEITHER THE PUBLISHER NOR AUTHORS SHALL BE LIABLE FOR ANY LOSS OF PROFIT OR ANY OTHER COMMERCIAL DAMAGES, INCLUDING BUT NOT LIMITED TO SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER DAMAGES.
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Library of Congress Control Number: 2023948619
ISBN 978-1-394-21625-3 (pbk); ISBN 978-1-394-21626-0 (ebk); ISBN 978-1-394-21627-7 (ebk)
Introduction
Perhaps you bought this book online, either in text or digital format. But if you’re still the kind of Canadian reader who prefers to browse through aisles and handle books before you buy them, you may be standing in the personal finance section of your favourite bookstore right now. If so, take a look to your left. Do you see that schmo in the baggy jeans perusing the book on day-trading stock options? Now look to your right. Do you see the ninny in the blue hoodie thumbing through that paperback on how to make millions overnight in sketchy real estate property flipping deals? We want you to walk over to them. Good. Now we want you to take this book firmly in your hand. Excellent. Finally, I want you to smack each of them over the head with it.
There. Didn’t that feel good?
Wiley, the publisher of this book, has lawyers who will want us to assure you that we’re only kidding about smacking someone with this book. So in deference to the attorneys, and because we want to get our royalty checks, we’re kidding. Really and truly, don’t hit anyone.
But the fact is that someone should knock some sense into these people. If not, they may wind up — as do most people who try to get rich quick — with nothing but big holes in their pockets.
Those who make the most money in the world of investments possess an extremely rare commodity in today’s world. It’s called patience. At the same time that they’re looking for handsome returns, they’re also looking to protect what they have. Why? Because a loss of 75 percent in an investment (think tech stocks 2000–2002) requires you to earn 400 percent to get back to where you started. Good luck getting there.
In fact, garnering handsome returns and protecting against loss go hand in hand, as any financial professional should tell you. But only the first half of the equation — the handsome returns part — gets the lion’s share of the ink. Heck, there must be 1,255 books on getting rich quick for every one book on limiting risk and growing wealth slowly but surely.
Welcome to that one book: Bond Investing For Canadians For Dummies.
YES, we know, we know. This book is being published in what may turn out to be possibly some of the worst few years in bond history. What lousy timing. Well, no, not really…. In fact, to make this year (2023) the worst year in history, bonds would have to lose more than the aggregate US bond market lost in 1969 — a tad more than 5 percent. Heck, the stock market can easily lose double that in a day. As we’re writing these words, the Canadian and US stock markets on Bay and Wall Street continue to be fickle and volatile, with no clear longer-term direction in sight.
So just what is this investment that even in the worst of times loses little value, this investment that is both the past and present’s best complement to stocks?
A bond. That’s what. A bond is basically an IOU. You lend your money to the federal or local government, to General Electric, to Microsoft, to Barrick Gold, or to the Canadian city where you live — to whatever entity issues the bonds — and that entity promises to pay you a certain rate of return in exchange for borrowing your money. Bond investing is very different from stock investing, where you purchase shares in a company, become an alleged partial owner of that company, and then start to pray that the company turns a profit and the CEO doesn’t blow it all.
Stocks (which we love as well by the way, thank you very much) and bonds totally complement each other! Like peanut butter and jelly. Bonds are the peanut butter that can keep your jelly from dripping to the floor. They’re the life rafts that can keep your portfolio afloat when the investment seas get choppy. And yes, bonds are handy as a source of steady income, but, contrary to popular myth, that shouldn’t be their major role in most portfolios.
Bonds are the sweethearts that may have saved your grandparents from selling apples on the street during the hungry 1930s. (Note that we’re not talking about high-yield “junk” bonds here.) They’re the babies that may have saved your RRSP from devastation during the three growly bear-market years on Bay and Wall Street that started this century. In 2008, high-quality bonds were just about the only investment you could have made that wound up in the black at a time when world markets frighteningly resembled the Biblical Red Sea. And in March of 2020, when the pandemic unleashed itself upon the world and the Dow and Toronto Stock Exchanges dropped precipitously over the course of several days? Yup, bonds were the place to be.
Bonds belong in nearly every portfolio. Whether or not they belong in your portfolio is a question that this book will help you answer.
About This Book
Allow the following pages to serve as your guide to understanding bonds, choosing the right bonds or bond funds, getting the best deals on your purchases, and achieving the best prices when you sell. You’ll also find out how to work bonds into a powerful, well-diversified portfolio that serves your financial goals much better (we promise) than day-trading stock options or attempting to make a profit flipping real estate in your spare time.
We present to you, in easy-to-understand English (unless you happen to be reading the Swedish or Korean translation), the sometimes complex, even mystical and magical world of bonds. We explain such concepts as bond maturity, duration, coupon rate, callability (yikes), and yield. And we show you the differences among the many kinds of bonds, such as Treasuries, agency bonds, provincial bonds, corporates, munis, zeroes, convertibles, and strips.
Because this book is all-new in Canada, we also fill you in on some important goings-on in the bond world over the past decade. Notably, we cover the deep pandemic-induced stock market dip of early 2020 and the “rush to safety” that made bonds, especially US Treasury and Government of Canada bonds, the belles of the ball. We also discuss less cheerful times for bonds, starting with the super-low interest rates of the past decade or so, culminating in early-to-mid 2022 with a sudden, steep rise in interest rates, bringing a serious sag in bond prices.
In recent years, the number and types of bond funds in which Canadian investors can now sink their money has virtually exploded, for better or worse. Many of these new funds (mostly exchange-traded funds) are offering investors slices of the bond market, often packaged in a way that makes bond investing trickier than ever.
In this book, you discover the mistakes that many bond investors make, the traps that some wily bond brokers lay for the uninitiated, and the heartbreak that can befall those who buy certain bonds without first doing their homework. (Don’t worry; we walk you through how to do your homework.) You find out how to mix and match your bonds with other kinds of assets — such as stocks and other financial resources — taking advantage of the latest in investment research to help you maximize your returns and minimize your risk.
Here are some of the things that you need to know before buying any bond or bond fund — things you’ll know cold after you read Bond Investing For Canadians For Dummies:
What’s your split gonna be? Put all of your eggs in one basket, and you’re going to wind up getting scrambled. A key to successful investing is diversification. Yes, you’ve heard that before — so has everyone — but you’d be amazed how many people ignore this advice.
Unless you’re working with really exotic investments, the majority of most portfolios is invested in stocks and bonds. The split between those stocks and bonds — whether you choose an 80/20 (aggressive) portfolio (composed of 80 percent stocks and 20 percent bonds), a 50/50 (balanced) portfolio, or a 20/80 (conservative) portfolio — is possibly the single most important investment decision you’ll ever make. Stocks and bonds are very different kinds of animals, and their respective percentages in a portfolio can have, will have, a profound impact on your financial future. Chapter 12 deals with this issue directly, but the importance of properly mixing and matching investments pops up in other chapters as well.
Exactly what kind of bonds do you want?
Depending on your tax bracket, your age, your income, your financial needs and goals, your need for ready cash, and a bunch of other factors, you may want to invest in Treasury, corporate, agency, or municipal bonds. Within each of these categories, you have other choices to make: Do you want long-term or short-term bonds? Higher quality bonds or higher yielding bonds? Freshly issued bonds or bonds floating around on the secondary market? Bonds issued in Canada and the United States, or bonds from Mexico or Japan? We introduce many different types of bonds in
Part 2
, and we discuss which may be most appropriate for you — and which are likely to weigh your portfolio down.
Where do you shop for bonds?
Although bonds have been around more or less in their present form for hundreds of years (see a brief history of bonds in
Chapter 3
), the way you buy and sell them has changed radically in recent years. Bond traders once had you at their tender mercy. You had no idea what kind of money they were clipping from you every time they traded a bond, allegedly on your behalf. That’s no longer so. Whether you decide to buy individual bonds or bond funds (
Chapter 14
helps you make that thorny decision), you can now determine almost to the dime how much the hungry Bay Street brokers intend to nibble — or have nibbled from your trades in the past.
Part 4
is your complete shopper’s guide.
What kind of returns can you expect from bonds, and what’s your risk of loss?
Here’s the part of bond investing that most people find most confusing — and, oh, how misconceptions abound! (You can’t lose money in AAA-rated bonds? Um, how can we break this news to you gently?) In
Chapter 4
, we explain the tricky concepts of duration and yield. We tell you why the value of your bonds is so directly tied to prevailing interest rates — with other economic variables giving their own push and pull. We give you the tools to determine just what you can reasonably expect to earn from a bond, and under what circumstances you may lose money.
If you’ve ever read one of these black-and-yellow For Dummies books before, you know what to expect. This isn’t a book you need to read from front to back or (if you’re reading the Chinese or Hebrew edition) back to front. Feel free to jump back and forth to glean whatever information you think will help you the most. No proctor with bifocals will pop out of the air, Harry Potter–style, to test you at the end. You needn’t commit all the details to memory now — or ever. Keep this reference book for years to come as your little acorn of a bond portfolio grows into a mighty oak.
Conventions Used in This Book
To help you navigate the text of this tome as easily as possible, we use the following conventions:
Whenever we introduce a new term, such as, say,
callability
or
discount rate,
it appears (as you can clearly see) in
italics.
You can rest assured that a definition or explanation is right around the corner.
If we want to share some interesting tidbit of information that isn’t essential to your successful investing in bonds, we place it in a
sidebar,
a grayish rectangle or square with its own heading, set apart from the rest of the text. (See how this whole italics/definition thing works?)
We’ve formatted all web addresses clearly so they’re easy to pick out if you need to go back and find them.
Keep in mind that when this book was printed, some web addresses may have needed to break across two lines of text. Wherever that’s the case, rest assured that this book uses no any extra characters (hyphens or other doohickeys) to indicate the break. So, when going to one of these web addresses, just type in exactly what you see in this book. Pretend that the line break doesn’t exist.
What You’re Not to Read
Unless you’re going to become a professional bond trader, you don’t need to know everything in this book. Every few pages, you’ll undoubtedly come across some technical stuff that’s not essential to becoming a successful bond investor. Read through the technical stuff if you want to, or, if ratios and percentages and such make you dizzy, feel free to skip over it.
Most of the heavy technical matter is tucked neatly into the grayish sidebars. But if any technicalities make it into the main text, we give you a heads up with a Technical Stuff icon. That’s where you can skip over or speed read — or choose to get dizzy. Your call!
Foolish Assumptions
If you feel you truly need to start from scratch in the world of investments, which is dominated by equity investments, perhaps the best place is the latest edition of Stock Investing For Canadians For Dummies (published by Wiley). But the book you’re holding in your hands is only a smidgen above that one in terms of assumptions about your investment savvy. We assume that you’re intelligent, that you have a few bucks to invest, and that you have a basic education in math (and maybe a rudimentary knowledge of economics) — that’s it.
In other words, even if your investing experience to date consists of opening a savings account, balancing a checkbook, and reading a few Report on Business or other business columns in Canadian dailies, you should still be able to follow along. Oh, and for those of you who are already buying and selling bonds and feel completely comfortable in the world of fixed income, we’re assuming that you, too, can learn something from this book. (Oh? You know it all, do you? Can you tell me what a sukuk is or where to buy one? See Chapter 9!)
How This Book Is Organized
Here’s a thumbnail sketch of what the following pages entail.
Part 1: A Quick Guide to the Fixed-Income Universe
In this first part, you find out what makes a bond a bond and discover the rationale for their very existence. We take you through a portal of time to see what bonds looked like decades, even centuries, earlier. You get to see how bonds evolved and what makes them so very different from other investment vehicles. We give you a primer on how bonds are bought and sold. We introduce you to the sometimes quite confusing ways in which bond returns are predicted and measured. And we discuss today’s low interest-rate environment and how that affects you as a bondholder (beyond the obvious).
Part 2: Bonds of Many Distinct Flavors
Practically anyone who wants to raise money can issue a bond. The majority of bonds, however, are issued by the US Treasury, Canadian federal government, government agencies and provinces, corporations, and municipalities. This section examines the advantages and potential drawbacks of each and looks at the many varieties of bonds that these entities may offer. We also introduce you to some rather unusual breeds of bonds — not the kind your grandfather knew!
Part 3: Bonds as Portfolio Cement
All investments — including bonds — carry their own promises of returns and measures of risk. Some bonds are almost as safe as bank GICs; others can be as wildly volatile as tech stocks. In this part of the book, we help you assess just how much investment risk you should be taking at this point in your life, and how — by using a mix of different bonds — you can minimize that risk for optimal return.
Part 4: A Manual for Smart Bond Shopping
Here, we address the role of bond brokers; discuss the pros and cons of owning individual bonds as opposed to bond funds; explain how to buy and sell bonds without getting clipped; and offer ways to protect yourself so that you don’t get stuck with any fixed-income dogs. (The kennel has lately become overpopulated.) We reveal ways for you to blow away the black smoke that has long shrouded the world of bond trading.
Part 5: Bonds as Good Friends of Retirees
Many people think of bonds as the ultimate retirement tool. In fact, they are — and they aren’t. In this section, we discuss bonds as replacements for your paycheck. As you’ll discover, many retirees rely too heavily on bonds — or on the wrong kinds of bonds. Reading this section, you may discover that your nest egg needs either a minor tune-up or a major overhaul and that your bond portfolio needs beefing up or paring down.
Part 6: The Part of Tens
This final section — a standard feature in all Dummies books — wraps up the book with some practical tips and a few fun items.
The web offers much in the way of additional education on bonds, as well as some excellent venues for trading bonds. Let the appendix, which appears after this part, serve as your web guide.
Icons Used in This Book
The margins of this book are filled with little cartoons. In the Dummies universe, these are known as icons, and they signal certain (we hope) exciting things going on in the accompanying text.
Although this is a how-to book, it also has plenty of whys and wherefores. Any paragraph accompanied by this icon, however, is guaranteed to be at least 99.99 percent how-to.
Read twice! This icon indicates that something important is being said and is really worth committing to memory.
The world of bond investing — although generally not as risky as the world of stock investing — still offers pitfalls galore. Wherever you see this icon, you know that danger of losing money lies ahead.
If you don’t really care how to calculate the after-tax present value of a bond selling at 98, yielding 4.76 percent, maturing in 9 months, but instead you’re just looking to gain a broad understanding of bond investing, feel free to skip or skim the denser paragraphs that are marked with this icon.
Beyond the Book
An effective way to focus on some of the key concepts of this book is to check out the online Cheat Sheet. Go online to dummies.com and search for Bond Investing For Canadians For Dummies Cheat Sheet.
Where to Go from Here
Where would you like to go from here? If you want, start at the beginning of this book. If you’re mostly interested in municipal bonds, hey, no one says you can’t jump right to Chapter 8. International bonds? Go ahead and flip to Chapter 9. It’s entirely your call. Maybe start by skimming the index at the back of the book.
Part 1
A Quick Guide to the Fixed-Income Universe
IN THIS PART …
Getting a bird’s-eye view of the bond market.
Appreciating the importance of bonds in a portfolio.
Exploring the history of bonds.
Understanding basic bond concepts such as interest and yield.
Chapter 1
Getting Interested in Bonds
IN THIS CHAPTER
Getting a handle on what exactly bonds are
Knowing why some bonds pay more than others
Meeting the major bond issuers in Canada and the US
Considering individual bonds versus bond funds
Long before we ever knew what a bond was, we both shared an experience early in life where we agreed to lend a small amount of money to friends. This was the first time we’d ever lent money to anyone. Neither of us could recall why our friends needed the money, but they both promised to repay us. After all, they were our friends.
Weeks went by, then months, and we couldn’t get our money back from our respective friends. One of us decided to escalate the matter to a higher authority, also known as the dad of one of our friends, Mr. Potts. The plan was for the dad to deliver a stern lecture to his son Tommy on the importance of maintaining his credit and good name. The conversation went something like this: “Er, Mr. Potts… I lent Tommy five bucks, and —”
“You lent him money?” Mr. Potts interrupted, pointing his finger at his deadbeat 12-year-old son, who, at that point, had turned over one of his pet turtles and was spinning it like a top. “Um, yes, Mr. Potts — $5.” Mr. Potts neither lectured nor reached for his wallet. Rather, he erupted into boisterous laughter. “You lent him money!” he bellowed repeatedly, laughing, slapping his thighs, and pointing to his turtle-spinning son. “You lent him money! HA…HA…HA…”
And that, dear reader, was a very memorable first experience as a creditor. We both experienced similar outcomes, under different scenarios, where neither of us ever saw a nickel from our friends, in either interest or returned principal.
Oh, yes, we’ve learned a lot since then.
Understanding What Makes a Bond a Bond
Now suppose that Tommy Potts, instead of being a goofy kid in the seventh grade, were the Canadian or US government. Or the cities of Vancouver, Toronto, or New York. Or Canadian Natural Resources Ltd. Tommy, in his powerful new incarnation, needs to raise not $5 but $50 million. So, Tommy decides to issue a bond. A bond is really not much more than an IOU with a serial number. People in spiffy business attire, to sound impressive, sometimes call bonds debt securities or fixed-income securities.
A bond is always issued with a specific face amount, also called the principal, or par value. Most often, simply because it’s the convention, bonds are issued with face amounts of $1,000. So, to raise $50 million Tommy would have to issue 50,000 bonds, each selling at $1,000 par. Of course, he would then have to go out and find investors to buy his bonds.
A bond pays a certain rate of interest, and typically that rate is fixed over the life of the bond (hence fixed-income securities). The life of the bond is the period of time until maturity. Maturity, in the lingo of financial people, is the date that the principal is due to be paid back. (Oh yeah, the bond world is full of jargon.) The rate of interest is a percentage of the face amount and is typically (again, simply because of convention) paid out twice a year, with some exceptions.
So, if a corporation or government issues a $1,000 bond, paying 5.5 percent interest, that corporation or government promises to fork over to the bondholder $55 a year — or, in most cases, $27.50 twice a year. Then, when the bond matures, be it one year, or 10 or 20 years down the road, the corporation or government repays the $1,000 to the bondholder.
In some cases, you can buy a bond directly from the issuer and sell it back directly to the issuer. But you’re more likely to buy a bond through a brokerage house or a bank. You can also buy a basket of bonds through a company that packages bonds into bond funds, mutual funds, or exchange-traded funds. These brokerage houses and fund companies will most certainly take a piece of the pie — and sometimes a quite sizeable piece. More on that and how to control the size of that piece of pie in Part 4.
So far, so good?
In short, dealing in bonds isn’t really all that different from the deal I worked out with Tommy Potts. It’s just a bit more formal. And the entire business is regulated by the Securities and Exchange Commission (SEC) in the US, the Canadian Securities Administrators (CSA) in Canada (among other national and provincial regulatory authorities), and most bondholders — unlike me in the seventh grade — wind up getting paid back!
Choosing your time frame
Almost all bonds these days are issued with life spans, or maturities, of up to 30 years. Few people are interested in lending their money for longer than that, and people young enough to think more than 30 years ahead rarely have enough money to lend. In US and Canadian bond lingo, bonds with a maturity of less than five years are typically referred to as short-term bonds. Bonds with maturities of 5 to 12 years are called intermediate-term bonds. And bonds with maturities of 12 years or longer are called long-term bonds. With specific reference to Treasury securities in both the US and Canada, one month to one-year maturities are “bills,” over one year to less than ten-year maturities are “notes,” and 10 years and longer are “bonds.”
When you look at the Globe and Mail’s financial pages, you typically see the current rates of return for 2-, 5-, 10-, and 30-year bond terms next to their return figure. These are also common terms posted for US Treasuries, be they bills, notes, or bonds. In reality, most Canadian government bonds have terms of 1, 2, 3, and 6 months; as well as terms for 1, 2, 3, 4, 5, 7, 10, 20, and 30 years. (We explain how returns are measured later on in Chapter 4.) In the US, bonds across all of these maturities are referred to as Treasuries or Treasurys. You may hear the terms Treasury Bill, Treasury Note, or Treasury Bond when US bonds are being discussed. In Canada, and when referring to Canadian equivalent financial instruments, a government bond can be called, for example, a Canada 1 Month Bill, Canada 2 Year Note, or Canada 10 Year Bond. Or, it can just be called a Canada Bond (or even Canadian Treasury) with the term indicated next to it. Sometimes they are just called Government of Canada Bonds, also with terms attached. There is no hard and fast rule for bond names and terms. In this book, we use terms interchangeably.
Government bonds can be bought in denominations ranging from $1,000 to $1,000,000. In Canada, you can find government bonds issued by both the federal and provincial governments, as well as municipalities and government agencies. Treasury “bills” in the US and Canada do not pay a coupon (something we explain in Chapter 4). Rather they are offered at a discount to face value. “Notes” and “bonds,” on the other hand, pay you interest in the form of coupons, and this is done semi-annually. T-bills are typically short-term investments, with maturities ranging from a month to a year.
In general, the longer the maturity, the greater the interest rate paid. That’s because most bond buyers expect higher compensation in relation to the amount of time their money is tied up. The longer the time frame, the degree of risk increases that could affect the return. At the same time, bond issuers are willing to fork over more interest in return for the privilege of holding onto investors’ money longer. We delve deeper into interest and yield on bonds in Chapter 4.
It’s the same theory and practice with bank certificates of deposit (CDs) or term deposits (TDs). Typically, a two-year CD or TD pays more interest than a one-year CD or TD, which in turn pays more than a six-month CD or TD.
CDs, a term used more in the US, and TDs, a term used in Canada, are “time deposits” and are essentially savings accounts where you promise not to touch the money for a period of time. The same is true with a GIC, another financial instrument that most Canadians are familiar with. We keep our discussion limited in this book to GICs and TDs.
Government of Canada Bonds are sometimes just referred to as a “Canada Bond” (with the terms being one of 1, 2, 3, and 6 months; and 1, 2, 3, 4, 5, 7, 10, 20, and 30 years).
The key difference between a guaranteed investment certificate and a term deposit is that term deposits usually have shorter terms (ranging between 30 and 364) days than GICs (usually locked in for at least one year and up to five years).
The different rates that are paid on short-, intermediate-, and long-term bonds make up what’s known as the yield curve. Yield refers to the annual payout on your investment. Because longer-term bonds tend to pay more, the yield curve, when seen on a page, typically slopes up to the right. But sometimes the curve can be flat, or, in rare instances, even slope downward (that’s called yield-curve inversion). In Chapter 4, we provide an in-depth discussion of interest rates, bond maturity, and the all-important yield curve.
Picking an issuer you can trust to hold your money
Consider again the analogy between bonds and bank GICs. Both tend to pay higher rates of interest if you’re willing to tie up your money for a longer period of time. But that’s where the similarity ends.
When you give your money to a savings bank to plunk into a GIC (or TD, savings or chequing account, or foreign currency) that money — your principal — is almost certainly guaranteed (up to $100,000 per account, per person, per ownership registration in a registered account such as an RRSP, TFSA, RDSP, or RRIF) by the Canada Deposit Insurance Corporation (CDIC). You can choose your bank because it’s close to your house or because it gives lollipops to your kids, but if solid economics are your guide, your best bet is to open your GIC where you’re going to get CDIC insurance (almost all banks carry it) and the highest rate of interest. End of story. “Per person, per ownership registration,” in case you’re wondering, means that a joint account would be insured up to $200,000. Check out the CDIC website at www.cdic.ca for the latest updates and to see whether your financial institution is covered.
Things aren’t so simple in the world of bonds, where the CDIC does not insure your investment. In this world — and I can’t emphasize this enough — a higher rate of interest isn’t always the best deal. When you fork over your money to buy a bond, your principal, in most cases, is guaranteed only by the issuer of the bond. That “guarantee” is only as solid as the issuer itself. (Remember our inaugural — and only — lender experience?) That’s why US Treasury bonds (guaranteed by the US government) and Government of Canada Bonds (fully guaranteed by the Canadian government) pay one rate of interest, Microsoft bonds pay another rate, and Cadillac Fairview Properties Trust bonds pay yet another rate. Can you guess where you’ll get the highest rate of interest?
You’d expect the highest rate of interest to be paid by Cadillac Fairview. (Currently true, in large part thanks to a sluggish post-pandemic commercial real estate recovery.) Why? Because lending your money to the real estate developer involves the risk that your money may sink into a deep dark hole. In other words, if real estate values plunge and the developer cannot finance its projects, you may lose a good chunk of your principal. In order for investors to accept that amount of risk, the company has to pay a relatively high rate of interest. Without being paid some kind of risk premium, you’d be unlikely to lend your money to a company that may not be able to pay you back.
Conversely, the US and Canadian governments, which have the power to levy taxes and print money, aren’t going bankrupt anytime soon. Therefore, US Treasury bonds and Canada Bonds, which are said to carry only a very small risk of default, tend to pay the most modest interest rates. Often, the interest rate paid on Treasury bonds is referred to as the risk-free rate.
Bonds that carry a relatively high risk of default — are commonly called high-yield or junk bonds. Bonds issued by established and financially sound companies and governments (federal or provincial) that carry little risk of default are commonly referred to as investment-grade bonds.
There are many, many shades of gray in determining the quality and nature of a bond. It’s not unlike wine tasting in that regard. In Chapter 4, and again in Chapter 14, we give specific tips for “tasting” bonds and choosing the finest vintages for your portfolio.
Recognizing the difference among bonds, stocks, and cryptocurrencies
Aside from the maturity and the quality of a bond, other factors can weigh heavily in how well a bond performs. In the following chapters, we introduce you to terms that affect bond performance, such as callability, duration, and correlation, and explain how the winds of the Canadian and US economies — and even the whims of the bond-buying public — can affect the returns on your bond portfolio.
For the moment, we simply want to point out that, by and large, bonds’ most attractive features for investors — and the traits that most bonds share — are stability and predictability, well above and beyond that of most other investments. Because you are, in most cases, receiving a steady stream of income, and because you expect to get your principal back in one piece, bonds tend to be more conservative investments than, say, stocks, commodities, cryptocurrencies, and collectibles. In a typical year, the value of investment-grade bonds might rise or fall no more than the stock market will on an average day, or some cryptocurrencies will in an average hour!
THE BOND MARKET IS HUGE
How much is invested in bonds worldwide? Are you holding onto your seat? According to the latest figures compiled by the Securities Industry and Financial Markets Association, the total value of all bonds outstanding worldwide is now over $127 trillion. That’s more than five times the current gross domestic product of the United States — the dollar value of all goods and services produced in that country in an entire year. The US fixed income market comprised 38.7percent or $49 trillion of the worldwide amount. In contrast, the Canadian market was 3.2 percent, or $4 trillion of the worldwide total, and continues to grow. In 2007, the Canadian market was $1.55 trillion; in 2021, it was $4 trillion. Given that the stock market gets so much more attention than the bond market, you may be surprised to know that the total value of all stocks outstanding worldwide is about a “mere” $100 trillion.
Another interesting fact is that in 2021, for US household liquid financial assets (bonds and equities) the size of the equity market holdings was actually slightly less than the bond market holdings. The same proportions apply to Canadian households.
Is conservative a good thing? Sometimes. Sometimes not. It’s true that many people (men, more often than women) invest their money too aggressively, just as many people (regardless of gender) invest their money too conservatively. The appropriate portfolio formula depends on what your individual investment goals are and your personal taste for risk. We help you to figure these out in Chapters 12 and 13.
By the way, our comment about men investing more aggressively isn’t a personal take on the subject. Some solid research shows that men do tend to invest (and drive) much more aggressively than do women.
Why Hold Bonds? (Spoiler Alert: It Isn’t Necessarily to Make You Rich)
In the real world, while lots people own bonds, they are often the wrong bonds in the wrong amounts, and purchased for the wrong reasons. Some people have too many bonds, making their portfolios too conservative; others have too few bonds, making their stock-heavy portfolios too volatile. Some have taxable bonds where they’d be better off with tax-sheltered bonds held in a registered plan such as an RRSP, RRIF, or TFSA, and vice versa. The first step in building a bond portfolio — or any portfolio, for that matter — is to have clear investment objectives. (“I want to make money” — something we hear from clients all the time — is not a clear investment objective!) We’ll help you develop clear objectives in Chapter 2. In the meantime, we want you to consider some of the typical reasons — both good and bad — as to why people buy and hold bonds. The main reasons we cover are for cash flow, diversification, and return (also called yield).
[heading] Going for Cash Flow
A typical reason is that people buy bonds because they perceive a need for steady income, and they think of bonds as the best way to get income without putting their principal at risk. It is generally accepted that bonds are a relatively safer investment than equities in general. That’s because equities are exposed to more types of risk. Nevertheless, risks still exist with bonds, and we discuss those risks in Chapter 10.) But thinking of bonds, or bond funds, as the best — or only — source of cash flow or income can be a mistake.
Bonds are a better source of steady income than stocks because bonds, in theory (and usually in practice), always pay interest; stocks may or may not pay dividends and may or may not appreciate in price. Bonds also may be a logical choice for people who need a certain sum of money at a certain point in the future — such as college tuition or a down payment for a home — and can’t risk a loss.
But unless you absolutely need a steady source of income, or a certain sum on a certain date, bonds may not be such a hot investment. Over the long haul, they have tended to return much less than stocks. We revisit this issue and talk much more about the differences between stocks and bonds, in Chapter 12.
Going for Diversification
One of the essential reasons people buy bonds has to do with diversification. What is diversification, you ask. It is a strategy of investing that spreads risk across a portfolio of investments. Bonds and stocks move in opposite directions when markets change. Bonds increase in value when stocks decrease in value, and vice versa. So you can see how holding both bonds and stocks in a portfolio has a balancing effect.”
The key to truly successful investing, as we outline in Chapter 11, is to have at least several different asset classes — different investment animals with different characteristics — all of which can be expected to yield positive long-term returns but that do not all move up and down together.
There are very few assets classes — if any! — that serve as valiantly as bonds where it comes to diversifying a portfolio of stocks. History proves this, and you don’t need to go back very far. In 2008, when the S&P 500 lost nearly 37 percent, US Treasuries rose by 20 percent, and Government of Canada Bonds well outperformed the S&P/TSX as well.
You can hold many different types of bonds, meaning that another level of diversification exists. In this book, we focus on the heavy hitters: Government of Canada Bonds and Treasury bills; federal and provincial Crown corporation securities (also known or reported as agency or corporate bonds); Provincial bonds and Treasury bills; Corporate Bonds (of public companies); and municipal bonds (and sometimes their own distinct sub-entities). We devote entire chapters for these types of bonds, which collectively represent the bulk of the bond (fixed-income) market.
As Steve Jobs used to say, “… and one more thing …”
Bonds, in the land of fixed-income securities, also include financial instruments with cool and tongue-twisting names such as:
Bank, trust, and mortgage company securities and paper
Asset-backed securities and paper of various kinds
Mortgage-backed securities
Maple Bonds
Strip Bonds
Real-return bonds
Structured Products such as fixed floaters, step-up bonds, and foreign Sovereign debt
Euro bonds
Bankers’ Acceptances
Corporate and finance company paper
We will touch some of on these types of products throughout the book.
Going for the cash
Bonds aren’t very popular with the get-rich-quick crowd. Bonds are to the tortoise what an insider hot stock tip is to the hare. But certain categories of bonds — high-yield corporate (junk) bonds, for example — have been known to produce impressive gains.
High-yield bonds may have a role — a limited one — in your portfolio, as we discuss in Chapter 6. But know up front that high-yield bonds don’t offer the potential long-term returns of stocks, and neither do they offer the portfolio protection of investment-grade bonds. Rather than zigging when the stock market is zagging, many high-yield bonds tend to zag right along with your stock portfolio. Be careful!
THE BONDS IN YOUR WALLET…
A US Treasury or Government Canada bond represents a debt. To you. The US and Canadian governments owe you, and any time you want to you can turn in your bond for cash. Ah, but what’s cash but another form of IOU! All banknotes (dollars, euros, pounds, bonds, bills, notes…) represent the issuing nation’s central bank’s debt to the public. So, what’s the difference between a Treasury bond or Government of Canada Bond, and the $5 bill in your wallet? Not much, really. Although dollar bills are never referred to as government bonds, that’s really what they are, with two notable differences: One pays interest, however modest, for perhaps a month, or perhaps 20 years, while the other pays none. One — the one with the illustration of a tall former prime minister — because it pays no interest, has a more stable value. And where it comes to buying a cup of coffee, the $5 bill is certainly the more practical of the two.
Some high-yield bonds are better performers than others — and they’re held by relatively few people. We recommend those in Chapter 9.
Even high-quality investment-grade bonds are often purchased with the wrong intentions. Note: A US Treasury bond, though generally thought to be the safest bond of all, doesn’t guarantee your return of principal unless you hold it to maturity. If you buy a 20-year bond and you want to know for sure that you’re going to get your principal back, you’d better plan to hold it for 20 years. If you sell it before it matures, you may lose a bundle. Bond prices, especially on long-term bonds — yes, even US or Canadian government bonds — can fluctuate greatly. We discuss the reasons for this fluctuation in Chapter 4.
We also discuss the complicated and often misunderstood concept of bond returns. You may buy a 20-year Canada Bond yielding 3 percent, and you may hold it for 20 years, to full maturity. Yes, you’ll get your principal back, but you may actually earn more or less than 3 percent interest on your initial investment. It’s complicated, but we explain this variation in a way you can understand — we promise! — in Chapter 4.
