Sid Mohapatra | January 19, 2023
✓ Verified by Harshil Dhanky
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While not as common as buying equities, investing in bonds is still fairly popular as bonds are great vehicles to generate income while keeping capital protected.
To successfully allocate towards a fixed income portfolio, investors can benefit from utilizing the following framework to buy bonds in Canada.
1. Choose a Trading Platform That Supports Bonds
- Robust global bond trading platform combined with fixed income futures to supplement hedging needs if desired. The platform also has the largest fixed income inventory offered to retail investors.
- While not free, the platform offers no markups to bond pricing and nominal brokerage charges (less than 50 basis points for most bonds).
- Complex platform with somewhat of a learning curve for beginners as the desktop app has a lot of features and capabilities that may not be relevant to those investors starting out. However, the mobile app is great for beginner investors.
Visit Interactive Brokers
- Bonds and bond ETFs can be bought commission-free. For bonds, the minimum investment needs to be $5,000.
- Questrade’s free Bond Bulletin service provides updated pricing for the entire fixed-income inventory representing Government, Provincial, Municipal and Corporate Issuers.
- Without significant fixed income experience, it might be hard for new investors to navigate the marketplace and discern what bonds are under or overvalued based on just prices and availability of product.
- Ability to build custom portfolios based on investment goals and objectives. By giving the platform your risk tolerance, holding period and bias, the algo can suggest a portfolio that mostly comprises of index products to closely match the appropriate benchmark.
- Flat fee as a percentage of the portfolio is charged without any performance fee or administrative charges buried in the fine print. Also, the first $10,000 is managed free of cost to help investors get started.
- Lack of active management and a cookie-cutter method that may not be nimble enough to hedge and rebalance positioning to avoid or minimize losses. Ideal for long-term investors that are not looking for discretionary fixed income exposure.
When deliberating on a bond trading broker, investors need to keep in mind several factors such as different kinds of bonds that they’re considering investing in, investing style (passive or active), use of leverage (margin or derivatives) and execution costs (slippage, commissions, brokerage).
By honing in on what non-negotiables they desire from their broker, investors can select their ideal bond trading platform and start researching more about individual securities to allocate capital.
2. Open an Investment Account
Canadians can choose to open a registered account or a non-registered account based on their long-term goals, personal situations and eligibility criteria.
A registered account is a specified holding account for financial securities that is subject to certain rules and restrictions, but offers tax-incentives.
A Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) are the two most common registered accounts.
Any gains within a TFSA are tax-free, allowing Canadians to compound and grow their capital while avoiding capital gains along the way.
On the other hand, an RRSP contribution that is subject to eligibility rules can offset income during the year contributed or subsequent periods, thereby reducing tax liability in the process.
TFSA limits are more liberal and increase every year by a predetermined amount, which is independent of the previous year’s income.
However, RRSP limits are a derivative of total income declared the previous year and contributions made towards those limits.
These limits increase by 18% of the total income declared in the previous tax return for the subsequent year.
Furthermore, RRSP withdrawals can be made for specified outlays such as the Lifelong Learning Plan (funding education/tuition payments) or the Home Buyer’s Plan (to acquire residential real estate for primary residence purposes).
Any withdrawals need to be repaid on a specified schedule; otherwise, these withdrawals will be subject to taxes.
Non-registered accounts on the other hand are subject to capital gains and losses but allow investors to withdraw capital freely and employ more active, short-term strategies as they desire.
The simplest example is a cash account.
Upon selecting the account type most suitable for the investor, they can complete the account opening process and submit the necessary documentation to set up their account to start investing.
Usually, this process can take a few business days.
3. Deposit Funds into Your Account
Once a strategy is chosen, investors can fund their brokerage account and initiate bond purchases.
Most brokers have several methods to deposit funds and these vary from broker to broker.
Oftentimes, a bank wire or electronic transfer is the most reliable and cost-effective manner to fund your account.
These can take 2-3 business days to show up in your account.
Another popular method is adding the broker as a payee under the bill payment section of online banking apps.
This provides a quick and timely deposit method with faster processing in some cases.
Once funds are credited, the investor can begin building their fixed-income portfolio by allocating capital.
To look up a particular bond, search using the trade or quote section on the investing platform by entering the issuer, along with the maturity to find the bond.
4. Purchase Your Desired Bonds
Once the foundation has been laid, the investor can start investing and purchasing bonds by looking up the security using the issuer name, along with the maturity or CUSIP.
Most brokerage platforms have a pre-built list of the most actively traded bonds and associated data such as Yield to Maturity, Coupon, and Dollar Value of a Basis Point (DV01) metrics.
After loading the security and analysing the information, investors can place buy and sell orders using market or limit orders.
Market orders execute immediately based on the prevailing prices while limit orders will execute at the desired price levels (or below).
The bond purchased will show up as an open position with the cost of acquisition, quantity, and unrealized profit or loss in the dashboard of the investing platform.
Buying Bonds Directly from The Issuer
Similar to buying shares during an initial public offering (IPO), investors are able to participate in a primary bond offering to buy bonds directly from the issuer rather than on the secondary market.
Investors intending to buy bonds directly need to be aware of the issuers and new issues coming to the market.
They can then contact their investment dealer to get allocation to the issue and pay brokerage (which is usually a flat fee).
Once bought, they receive coupon and principal payments directly into the bank account provided while purchasing the bonds.
Depending on the size of the investment, paying a flat fee to the broker may or may not make sense and it might be cheaper to buy bonds on the secondary market.
Frequently Asked Questions
- Are Canadian government bonds a good investment?
- How much do bonds pay in Canada?
- What bonds are available in Canada?
How to buy bonds in Canada? ›
In Canada, you can buy bonds through your brokerage account, or you can purchase bonds directly from the issuing government or corporation.How do bonds work in Canada? ›
Investors who purchase these bonds are essentially lending money to the bond issuer. In return, the bond issuer will pay back the loan, plus interest. Bonds are appealing to some investors because they offer a fixed rate of return. Generally, short-term bonds pay a lower interest rate than long-term bonds.How do you purchase bonds? ›
You can purchase government bonds like U.S. Treasury bonds through a broker or directly through Treasury Direct. As noted above, treasury bonds are issued in increments of $100. Investors can buy new-issue government bonds through auctions several times per year, by placing a competitive or a non-competitive bid.Does Canada offer bonds? ›
Government of Canada Bonds offer attractive returns and are fully guaranteed by the federal government. They are available for terms of one to 30 years and like T-Bills, are essentially risk-free if held to maturity.Can US citizens buy Canadian bonds? ›
Nearly all Canadian government bonds, except savings bonds, are available to Americans.What kind of bonds can I buy in Canada? ›
- Government of Canada Bonds.
- Provincial Bonds.
- Municipal Bonds.
- Investment-Grade Corporate Bonds.
- High-Yield Bonds.
- Strip Coupons and Residual Bonds.
With more than two months to go, Canadian banks in 2022 raised a record C$244.7 billion ($178.9 billion) of bonds in the domestic and international bond markets compared to over C$168 billion in 2021, according to data compiled by Bloomberg.What is the best way to invest money in Canada? ›
Investments with the best returns in Canada are high-interest savings accounts, GICs, T-bills, bonds, dividend-paying stocks, annuities, MBS, fractional shares, index funds, and segregated funds.How Does bank of Canada buy bonds? ›
Where we buy the bonds. As part of our normal operations, we buy bonds directly from the government to help us balance the stock of bank notes that exists on our balance sheet. But under QE , we buy bonds only on the open market.What is the interest rate on Canadian bonds? ›
The Canada 10Y Government Bond has a 2.947% yield. 10 Years vs 2 Years bond spread is -89.8 bp. Yield Curve is inverted in Long-Term vs Short-Term Maturities. Central Bank Rate is 4.50% (last modification in January 2023).
Are bonds tax free in Canada? ›
Source: Tax Templates Inc., August 2022. Interest income from sources such as bank accounts, guaranteed investment certificates (GICs), bonds and notes (including principal protected notes or PPNs), whether received from Canadian or foreign sources, is taxed at your full, marginal income tax rate.Can I buy $10000 worth of I bonds every year? ›
Normally, you're limited to purchasing $10,000 per person on electronic Series I bonds per year. However, the government allows those with a federal tax refund to invest up to $5,000 of that refund into paper I bonds.How much does a $100 bond cost? ›
You will pay half the price of the face value of the bond. For example, you'll pay $50 for a $100 bond. Once you have the bond, you choose how long to hold onto it for — anywhere between one and 30 years.