In Canada, you can buy bonds through your brokerage account or through a financial broker who will buy them directly from the issuing government or firm.
Buying a Bond ETF
A bond fund, such as a bond ETF, is the best option to buy bonds in Canada. Bond funds can invest in corporate or government bonds, short or long-term bonds, or a combination of all three. If you’re overwhelmed by the number of options, a broad market bond fund that includes both local and international bonds of varied terms from firms and governments is a good place to start. A bond ETF is the simplest and most cost-effective way to invest in a wide portfolio of bonds.
To buy shares of a bond ETF, just go to your brokerage account during trading hours, choose the ETF, and buy the number of shares you want to add to your portfolio. Because ETFs are traded on a stock exchange, your order will be filled and the bond fund shares will be added to your portfolio as soon as the transaction is finished. For any other ETF purchase, you will be charged the same commissions as your brokerage account.
Is it possible to acquire municipal bonds in Canada?
Municipal bonds are a good way to invest in fixed income. Are municipal bonds a good fit for your investment portfolio? Think about the advantages and disadvantages of these debt securities. Within Canada, a municipal bond is a debt security issued by a municipality, city, school board, financing authority, or transportation authority, to mention a few.
How do I go about purchasing municipal bonds directly?
- Use the services of a municipal securities dealer, such as a broker-dealer or a bank department. A private client broker is a broker who primarily deals with individual investors at a full-service broker-dealer, though they may also be referred to as “financial consultant” or “financial adviser.” The investor must make an explicit order to buy or sell securities in a brokerage account, and purchases and sells of municipal bonds through a broker-dealer must be preceded by a discussion with the investor.
When selling municipal securities, broker-dealers, like all other forms of investment alternatives, have particular responsibilities to investors. For example, when an investor buys or sells a municipal security, a broker-dealer must provide all material information about the investment to the investor and must give a fair and reasonable price. Full-service When broker-dealers buy or sell bonds for investors, they charge a fee. Broker-dealers that act “as principal” (that is, facilitate trades through their own inventory) charge a “mark-up” when selling bonds to investors and a “mark-down” when buying bonds from investors. The fee is called a “commission” when broker-dealers act “as agent” (that is, when they help identify a buyer or seller who deals directly with the investor). The MSRB pamphlet contains useful information on mark-ups and mark-downs, as well as other fees that brokers may charge.
- Engage the services of an investment adviser who can identify and trade bonds based on your specific or broad instructions. A registered investment adviser (RIA) manages accounts and acquires and sells securities in line with an investor’s agreed-upon plan without requiring individual consent for each transaction. When you engage an RIA, you should receive written paperwork that specifies both your account’s investment policy and the RIA’s investment procedure. To get a better price, RIAs frequently bundle purchases for multiple clients by trading in larger blocks. Account holders are frequently charged a management fee by RIAs. Some advisers price differently based on the interest rate environment and the interest profits that come with it.
- A self-managed account allows you to trade straight online. Another alternative for investors who wish to purchase and sell muni bonds on their own is to use a self-managed account, commonly known as “direct online trading,” which allows them to do so without the help of a private client broker or RIA. This is a broker-dealer account that charges commissions, mark-ups, and markdowns just like a full-service brokerage account. The firm has the same responsibilities to investors as any other broker-dealer, but it may perform them in a different way. For example, disclosure regarding a certain bond could be done only through electronic means, with no interaction with a private client broker. A self-managed account necessitates that the investor comprehend the benefits and drawbacks of each transaction.
- Purchase or sell municipal bond mutual fund shares. Another approach to engage in the municipal bond market is to purchase shares in a mutual fund that invests in muni bonds. Municipal bond mutual funds, which invest entirely or partially in municipal bonds, can be a good method to diversify your portfolio. While municipal bond funds can provide built-in diversification, you do not own the bonds directly. Instead, you hold a piece of the fund’s stock. This is significant because interest rate fluctuations have a different impact on municipal bond mutual fund owners than they do on direct municipal bond owners. Many investors who purchase individual municipal bonds aim to retain them until they mature, despite the fact that bond market values fluctuate between purchase and maturity. Mutual fund managers, on the other hand, are aiming for a stable or rising share price. If rising interest rates cause the market value of bonds in a mutual fund’s portfolio to drop, some of those bonds will be sold at a loss to avoid additional losses and pay for share withdrawals. You are subject to potential swings in the mutual fund’s value as a mutual fund stakeholder.
- Purchase or sell municipal bond exchange-traded funds (ETF). ETFs are a hybrid of mutual funds and traditional equities. The majority of municipal bond ETFs are structured to track an index. The share price of a municipal bond ETF can fluctuate from the ETF’s underlying net asset value (NAV) because it trades like a stock. This can add a layer of volatility to the price of a municipal bond ETF that a municipal bond mutual fund does not have. When an investor buys or sells shares of a municipal bond ETF, the transaction takes place over the exchange between investors (buyers and sellers). When an investor buys or sells shares in a municipal bond mutual fund, on the other hand, the transaction is handled directly by the mutual fund company. Municipal bond ETFs trade like stocks during market hours. A single purchase or sale of municipal bond mutual funds is permitted per day.
Expenses for mutual funds and ETFs include sales commissions, deferred sales commissions, and a variety of shareholder and running fees. FINRA’s Fund Analyzer allows you to compare fund fees and expenses.
Regardless of how you participate in the municipal bond market, the MSRB advises that you think about your investment needs and get written information from your financial professional regarding how fees are charged and which costs apply to your account before investing in a muni bond.
Is it still possible to purchase municipal bonds?
An online brokerage account allows an investor to buy and sell bonds directly. They can also be purchased from a bank or a full-service brokerage. Another option is to buy municipal bonds through an exchange-traded fund (ETF) or mutual fund.
Is it wise to invest in Canadian bonds?
Bonds issued by the Government of Canada offer significant returns and are backed by the federal government. They come in periods ranging from one to thirty years and, like T-Bills, are almost risk-free if held until maturity. With a period of more than one year, they are regarded the safest Canadian investment available. Until maturity, when the whole face value is repaid, they pay a guaranteed, fixed rate of interest. No matter how much you invest, the Government of Canada guarantees every penny of principal and interest. Even if you usually hold your assets until they mature, it’s comforting to know that Government of Canada Bonds are fully marketable and can be sold at any time for market value. Both U.S. and Canadian dollars can be used to buy Government of Canada Bonds, and both are considered Canadian content in your RSP/RRIF.
Key Benefits
- Regardless of the size of the investment, the safest Canadian investments are available in Canada.
- For RSP purposes, investments denominated in US dollars are considered Canadian content.
In Canada, how much do bonds pay?
The bond pays a fixed annual interest rate of 4%. You’ll earn $5,000 back if you hold the bond until it matures. A year later, you’ll receive 4% interest, or $200.
Are there any tax-free bonds available in Canada?
Municipal bonds are among the least well-known government securities in Canada, but they also happen to be among the highest-yielding and safest.
Some have excellent AAA ratings, which are nearly non-existent in the corporate market; all have yield premiums over their home provinces’ bonds; and none have defaulted since the 1930s, according to bond raters and investment bankers.
Despite their merits, “Munis” are obscure. According to Stephen Ogilvie, head of Standard & Poor’s Corp.’s municipal bond finance department in Toronto, they account for around 2% of the SC universe bond total return index, Canada’s leading bond index. Institutions often buy the offerings, while underwriters frequently reserve allotments for retail clients.
Munis are uncommon for the same reason that they are appealing, according to Ogilvie: “The reason for the lack of depth in the Canadian municipal bond market as there is in the United States is that Canadian municipalities are debt averse.” Their foreign counterparts, especially those in the United States, borrow significantly more.”
In addition, he points out that, unlike in the United States, where municipal bonds are exempt from certain income taxes, interest on Canadian munis is taxed as ordinary income, just like any other bond. In addition, there is no particular tax structure in place in Canada to provide a tax-free market for municipal bonds.
The traditional culprits in municipal bond purchases are pension funds and life insurance corporations. Because most of the issues are small, thinly traded, and carry premiums for their lack of liquidity, they frequently hold them to maturity. According to an investment banker who works with these bonds, the liquidity premium is usually baked into each offering as a one- or two-basis-point increase in yield. The market may further discount the notes, adding two to six basis points to the built-in premium. However, if you try to sell the majority of the issues, the yield premium you obtained as a buyer will be forfeited to the next bidder, who will be looking for his or her own “illiquidity discount.”
As a result, Canadian munis are keeper species. They also provide good incentives. For example, the Municipal Finance Authority of British Columbia, which manages debt offerings for the province’s municipalities and communities, recently issued a 10-year bond with a 4.338 percent yield to maturity due Oct. 31, 2016. This translates to a yield premium of 31.5 basis points over a June 2015 Canada bond and three basis points over a March 2016 Ontario bond. The entire issue size was $715 million, which included a previous debt issuance. The issuance, which is rated AAA by Moody’s Investors Service Inc. (AA+ by Standard & Poor’s), is an example of the yield and quality offered by the municipal bond market, which rarely offers issues below investment grade.
In contrast to the corporate bond market, where AAA ratings on straight corporate credits are rarely, if ever, issued, a number of Canadian municipalities, including Saskatoon and London, Mississauga, and the regional municipalities of Durham, Peel, and Halton in Ontario, offer a number of AAA credits. Dominion Bond Rating Service Ltd. ranks Toronto’s credit at AA (low), Winnipeg at AA (high), Calgary and Edmonton at AA (high), and Montreal at A. (high).
Although raters disagree on specific grades, all munis that are rated are investment-grade, according to Paul Judson, DBRS’s vice president for Canadian munis.
And, while all three types of bonds are financed by tax revenue that reflects the strength of their respective economies, munis have portfolio values that are quite different from federal and provincial bonds, according to Judson: “The credit quality of municipal bonds rests on the issuers’ taxing powers.” Property taxes, which are more predictable than income tax flows, are available to them. Property taxes are less affected by economic cycles than income taxes, which are used by higher levels of government.”
Furthermore, governments have the authority to seize property if owners do not pay their property taxes, according to Judson. Municipalities also have more leeway in raising taxes than other levels of government. He claims that when the economics of western provinces grow stronger, the security of munis grows.
Munis come in a variety of shapes and sizes. The simplest to analyze is the basic “bullet” bond, which has only one due date. For example, a $100 million City of Toronto issue due September 27, 2016 was priced at issue to yield 4.5 percent, saving 43.3 basis points over a comparable Canada bond. There are also “amortizing” bonds, which are issued in ten-bond series with consecutive due dates. Amortizing bonds can divide a $100 million issuance a reasonable sum in the munis market into ten $10 million bonds, each due one year apart and too little to support much of an aftermarket.
“Taking on less liquidity is rewarded with a higher yield,” says Dave Burner, senior vice president, government finance at National Bank Financial Ltd. in Toronto.
“For a time-specific return, municipal bonds are acceptable for a buy-and-hold strategy,” Judson says. “The concern is whether the yield boost is sufficient to cover the illiquidity.”
“How can you go wrong with a buy-and-hold strategy for high-quality munis, picking up a yield that can be up to 10% more than the yield on a federal bond?” enquires Derek Moran, president of Kelowna, British Columbia-based financial planning firm Smarter Financial Planning Ltd. “If you’re looking for a high yield, munis are a good option, especially if you buy at issue and hold until maturity.” That isn’t a means to make a profit, but it is a terrific way to produce consistent revenue.” IE
Is it possible to buy bonds without using a broker?
- Because bonds differ from stocks, most investors should include a percentage of their portfolio in bonds as a diversifier.
- Bonds are debt-like fixed-income securities that make bondholders creditors.
- Many brokers now allow clients to buy individual bonds online, while it may be quicker to buy a bond-focused mutual fund or exchange-traded fund (ETF).
- Without the use of a broker, government bonds can be acquired directly via government-sponsored websites.
- Residents of certain municipalities may be able to earn tax-free income through municipal bonds.
Is it wise to invest in I bonds in 2021?
- I bonds are a smart cash investment since they are guaranteed and provide inflation-adjusted interest that is tax-deferred. After a year, they are also liquid.
- You can purchase up to $15,000 in I bonds per calendar year, in both electronic and paper form.
- I bonds earn interest and can be cashed in during retirement to ensure that you have secure, guaranteed investments.
- The term “interest” refers to a mix of a fixed rate and the rate of inflation. The interest rate for I bonds purchased between November 2021 and April 2022 was 7.12 percent.
Is it wise to invest in municipal bonds in 2022?
The key drivers of the municipal market are all positive, therefore 2022 is expected to see ongoing robust demand for municipal bonds. Taxes are first and foremost. Investors are still concerned about increasing taxes and will do everything possible to avoid them, keeping demand high.