Find out what a bond is and how these investments earn a return.
When you buy a bond, you’re lending your money to a company or a government (the bond issuer) for a set period of time (the term). The term can be anywhere from a year or less to as long as 30 years. In return, the issuer pays you interest. On the date the bond becomes due (the maturity date), the issuer is supposed to pay back the face value of the bond to you in full.
2 ways to make money on bonds
1. Interest payments
With most bonds, you’ll get regular interest payments while you hold the bond. Most bonds have a fixed interest rate that doesn’t change. Some have floating rates that go up or down over time. On the bond’s maturity date, you’ll get back the face value.
Example – You buy a 10-year Government of Canada bond with a face value of $5,000. The bond pays a fixed interest rate of 4% a year. If you hold the bond until it matures:
You’ll get back $5,000.
You’ll get back 4% in interest, or $200, a year.
Your return will be about $2,000 over 10 years ($200 x 10).
Tip: Floating interest bonds match the interest rate on 3-month T-bills. They pay interest quarterly. If the T-bill rate goes up, you get more interest on your bonds. If the T-bill rate drops, you get less interest.
2. Selling a bond for more than you paid
In general, when interest rates go down, bond prices go up. If this happens, you can make money by selling your bond before it matures. You’ll get more than you paid for it, and you’ll keep the interest you’ve made up until the time you sell it. Learn more about how interest rates affect bond prices.
Caution: Savings bonds, such as Canada Savings Bonds, don’t work the same way as other government and corporate bonds. Learn more about savings bonds.
Bonds can lose money too
You can lose money on a bond if you sell it before the maturity date for less than you paid or if the issuer defaults on their payments. Before you invest, understand the risks.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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