What is a bond?
A bond is an investment in which you lend money to an entity for a
entity for a set period of time, at a fixed rate of interest. The value of a
can fluctuate according to changes in prevailing interest rates
credit quality and other factors.
As a general rule, bonds pay interest at a fixed period and the principal is repaid at maturity.
repaid at maturity.
For example, a $100,000 bond maturing in 10 years and yielding
of 5% could pay you $416.66 per month for 10 years. At maturity
the principal will be repaid to you.
However, the value of your $100,000 bond could increase if
interest rates fall. You could then resell your bond
for more than $100,000
Always remember that maturity and interest are fixed.
Reasons why bonds are better than GICs:
Canadian bonds have outperformed one-year GICs in 33 of the last 40 years, or 83% of the time.
Bonds have recorded negative returns in only five of the last 40 years: 1994, 1999, 2013, 2021 and 2022.
Bonds rebounded in the years following the negative returns, generating returns more than double those of GICs in 1995, 2000 and 2014.
In non-registered accounts, bonds are generally more attractive than GICs, since their returns are a combination of capital gain capital gains and income. GICs, only income. This means that after-tax returns on a 5% bond are more attractive than those on a GIC.
than a 5% GIC.
2022 was a difficult year for bonds, as the Fed raised rates
by 425 basis points. We haven't seen rate hikes of this magnitude in over
in over 30 years. This is an opportunity to seize, as the Fed is unlikely to
likely that the Fed will proceed with any further rate hikes of this magnitude.
I invite you to read Fidelity's article.
If you have any questions, please don't hesitate to contact us.