How to Buy Government and Corporate Bonds in Canada

Bonds represent a loan made by an investor to a government or corporation. Issuers use bonds to fund projects, operations, or manage debt. Investors receive periodic interest payments, known as coupon payments, and the initial amount loaned (principal or face value) is repaid on a predetermined maturity date. For investors, bonds offer a predictable income stream and are considered a stable component within a diversified portfolio.

Types of Bonds Available

In Canada, individual investors can access several categories of bonds, each with distinct characteristics regarding their issuer, risk profile, and typical returns.

Government bonds are issued by federal and provincial governments to finance public expenditures and manage debt. Federal government bonds, such as Government of Canada bonds, are considered to have the lowest credit risk because they are backed by the full faith and credit of the federal government. These often provide lower yields due to their high perceived safety. Provincial government bonds also carry a high degree of security but typically offer slightly higher yields than federal bonds to compensate for a marginally increased risk level. Both federal and provincial bonds come with various maturities.

Corporate bonds are debt securities issued by Canadian companies to raise capital for business operations, expansion, or other corporate purposes. The risk and potential return of corporate bonds vary significantly based on the financial health and creditworthiness of the issuing company. Investment-grade corporate bonds are issued by financially strong companies and have higher credit ratings, indicating a lower risk of default. Conversely, high-yield or “junk” bonds are issued by companies with lower credit ratings and carry a higher risk, but they offer higher interest rates to attract investors.

Municipal bonds, often referred to as “munis,” are issued by Canadian municipalities to fund local public projects like infrastructure development. These bonds typically share characteristics with provincial bonds in terms of safety, although their yields can vary based on liquidity and specific municipal financial factors.

Channels for Purchasing Bonds

Individuals in Canada have primary channels available for purchasing bonds: self-directed online brokerage accounts and engaging with financial advisors or wealth managers.

Self-directed online brokerage accounts provide a direct and often cost-effective way for retail investors to buy bonds. These platforms allow investors to manage their own portfolios, offering access to a wide selection of individual bonds, as well as bond Exchange Traded Funds (ETFs) and mutual funds. Investors can hold bonds within various account types, including registered accounts such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), or non-registered investment accounts. The process usually involves searching for specific bond offerings, reviewing their terms, and executing buy orders.

Working with a financial advisor or wealth manager offers a more personalized approach to bond investing. These professionals provide guidance, help construct diversified portfolios, and can offer access to a broader range of bond offerings, including new issues. Advisors can assist in understanding complex bond structures and tailoring investments to an individual’s specific financial goals and risk tolerance. While this channel typically involves advisory fees, it provides expertise and convenience for investors who prefer professional management or require more comprehensive financial planning.

Steps to Acquire Bonds

Acquiring bonds involves a series of procedural steps, beginning with establishing the appropriate investment vehicle and progressing through research, order placement, and understanding the settlement process.

Open an Investment Account

The initial step involves opening an investment account if one is not already established. For self-directed investors, this typically means setting up an online brokerage account, which requires providing personal identification, financial information, and agreeing to terms and conditions. Once the account is active and funded, the investor gains access to the platform’s trading capabilities. For those working with an advisor, the advisor will guide them through the necessary account opening paperwork.

Research Bond Offerings

Once the account is ready, the next step is researching available bond offerings to identify suitable investments. Online brokerage platforms provide bond screeners or search tools that allow investors to filter bonds based on criteria such as issuer type, maturity date, coupon rate, and credit rating. It is important to examine the bond’s offering documents, which provide detailed information on its terms, including the yield to maturity, call provisions, and the specific repayment schedule. Financial advisors will present curated options and explain these data points to their clients.

Place a Buy Order

After selecting a bond, the investor proceeds to place a buy order. On an online platform, this involves inputting the desired principal amount of the bond and confirming the purchase price, which may be quoted per $100 of face value. Some bonds may have minimum purchase amounts, often in denominations of $1,000 or more. When working with an advisor, the investor communicates their intent, and the advisor executes the trade on their behalf.

Understand Settlement

Following the placement of a buy order, the transaction undergoes a settlement period. This is the time it takes for the ownership of the bond to officially transfer and for funds to be exchanged. This period is typically two business days after the trade date. After settlement, the bonds are held electronically in the investor’s brokerage account, where they can be viewed alongside other investments. The investor will then receive periodic interest payments according to the bond’s schedule, and the principal amount will be returned at maturity.