the Wealthy Canadian

Many investors mistakenly believe bonds are issued only from the government, but nothing could be further from the truth. Bonds can also be issued by corporate entities. These two types should not be confused as they bear very different qualities of which the investor should be aware.

Government bonds, unlike corporate bonds, are sold based on currency. This means that when you invest in a Canada Savings Bond, you are investing in the Canadian Dollar. If you were to invest in a Corporate Bond, you would be investing in the company itself.

(Note: that the Canada Savings Bonds are not actually bonds but debentures. Remember that a bond holds some type of asset as security against the loan. However, the Canadian government will probably not default as they can always print more money – so I suppose that it is a bond with the valuation of our currency as collateral. Besides Canada Savings Debentures just doesn’t quite roll off the tongue in the same way.)

Government bonds have classically experienced less risk because currency markets tend to be more stable, especially ones in western countries. However, they do bear currency risk as witnessed with the 1998 ruble crisis in Russia where the value of their currency plummeted taking their bond values with it. If you want to avoid a majority of currency risk when your domestic currency is in fluctuation, you may want to purchase what is referred to as a sovereign bond. This means that you are still buying from your government, but you are invested in a foreign currency. You may also face inflation risk when purchasing government bonds. This means that the principal you are paid at maturity is worth less then what it was when you bought the bond in the first place. If you are afraid of this occurrence, you may want to look into the availability of inflation-indexed bonds.

Before any bond investment, it would be wise to research the parameters and the potential return on ones of interest to you. Next we will discuss corporate bonds and how they affect the potential investor.

Missed the previous posts in this series?
Bond and debentures
The bond market