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Bonds are a common kind of debt investment that can help diversify your portfolio. Learn more with the MoneySense Glossary.
Bonds are a form of debt security. Governments and corporations issue bonds to borrow money from investors. The amount borrowed is referred to as the bond’s face value or par value.
Interest is paid on the face value to reward investors for lending their money. The rate may be fixed—constant over the duration of the bond—or variable, changing over time in response to changes in a benchmark interest rate such as the prime rate.
Bonds are commonly referred to as fixed-income securities regardless of whether their interest rates are fixed or variable.
The maturity of a bond is the date the loan comes due. At maturity, the investor receives the face value plus any outstanding interest payments.
Investors need not hold bonds to maturity, however. Bonds can be bought or sold at any time, and their value may change, though in general, bonds are less volatile than equities (stocks). Their volatility is driven by changes in interest rates, the credit quality of the issuer and other factors. Most Canadian investors hold bonds indirectly, through mutual funds, exchange-traded funds (ETFs) and/or pension plans.
Example: “Yasmin moved more of her investment portfolio from stocks to bonds as she approached retirement. She wanted to receive a steady stream of interest income while reducing her exposure to stock market fluctuations.”
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