Bonds are a type of fixed income investment. When you buy a bond, you’re lending your money to a government or company for a set period of time (term). In return, they agree to pay you interest and return your original investment, called the “face value”, when the bond reaches maturity (the end of the bond’s term).
Bonds pay a fixed rate of interest each year until they mature.
At maturity, you receive the face value (also called par value), which is the amount the bond was originally issued for.
Terms usually range from 1 to 30 years.
There are two common types:
Government bonds – Issued by federal, provincial, or municipal governments
Corporate bonds – Issued by companies
In addition to interest payments, you may earn money if you sell the bond for more than you paid. This depends on interest rate changes:
If interest rates go down, bond values usually go up.
If interest rates go up, bond values usually go down.
Selling a bond when its value has increased can result in a capital gain. Selling when its value has dropped may result in a loss.
Credit risk: If the issuer can’t make interest payments or repay the bond, you could lose money.
Market risk: Bond values change with interest rates.
Issuer risk: If a company is dissolved, bondholders may have a claim on remaining assets, but there’s no guarantee you’ll recover your full investment.
Risk level: Moderate—higher than cash equivalents, lower than stocks
Return potential: Steady interest payments, possible capital gains
Liquidity: Can be sold before maturity, but price may vary
Use case: Can be suitable for income-focused investors or those seeking lower volatility than equities