Everything you need to know about bonds and domestic bonds
In this article, we answer all of your questions about domestic bonds to help you be manage your personal finances better.
By Fonds de solidarité FTQ
H ave you ever considered buying domestic bonds? They're a great, low-risk option that will stabilize your savings while stimulating the Québec economy. Here's everything you need to know about domestic bonds and how these debt securities help the local economy thrive.
What is a bond?
Just like you, businesses and governments need financing to carry out the projects they care about. You may do this too, by securing a mortgage loan, for example. Similarly, organizations issue bonds as a way to borrow money at a good rate. This gives them access to many investors.
From this perspective, when you buy bonds, you are lending money to companies, governments, and municipalities in exchange for interest that is paid out every year. You can either buy individual bonds on your own, or you can invest in mutual fund units that partly consist of bonds.
Accordingly, you will be one of the organization's creditors. In exchange, you'll receive periodic payments that will vary depending on the interest payment schedule and the life of the bonds. When you purchase bonds by investing in mutual funds, as is the case with FlexiFonds products, you'll receive a portion of the interest in the form of quarterly distributions that are then reinvested to purchase additional units.
Two ways to make money with bonds
- Interest payments issued up to the term of the bond. You agree to lend money to the issuer, which, in addition to reimbursing the capital you invested at the end of the bond term, will periodically pay you interest (generally at a fixed rate) up to the scheduled maturity date. The interest rate will apply for the entire life of the bond.
- Resale in the secondary market prior to maturity. You can resell your bond in a secondary market, such as the stock market, before it reaches maturity. If the sale price is higher than the original purchase price, you will make a profit.
Are bonds guaranteed investments?
Bonds are savings products that are generally less risky than stocks, but they are not a guaranteed investment.
There are two situations that could affect your principal and its interest:
- The bond issuer declares bankruptcy before the bond reaches maturity.
- The purchaser sells the bonds prior to the scheduled maturity date.
Stocks vs. bonds—what's the difference?
This table illustrates the differences between these two savings products.
| Stock | Bond | |
|---|---|---|
| Type of investment | Title deed (or ownership interest) | Debt security |
| Investor status | Co-owner | Co-creditor |
| Payment | Dividends | Interest |
| Scheduled maturity date | Unlimited | Limited (short- or long-term) |
| Investment | Non-guaranteed | Non-guaranteed |
| Voting rights | Yes, in some cases | No |
| Risk level | Relatively high | Relatively low |
Why invest in bonds?
Bonds can be an interesting way to diversify your portfolio. These assets are less risky than stocks and behave differently in response to market fluctuations. Bonds can therefore help balance your investments.
They can also be a good fit for short-term savings goals or if your risk tolerance is low. Furthermore, investing in domestic bonds lets you save for your goals while supporting the Québec economy.
Case study
A municipality in Québec wants to borrow $10 million to finance the construction of a cultural and sports centre. It decides to issue 1,000 bonds at a rate of $10,000 per bond, and applies the current interest rate of 1.5%. The municipality plans to redeem the full value of these bonds in 10 years.
Thomas decided to invest in the project and purchases one bond for $10,000. Each year, Thomas will receive 1.5% of his $10,000 investment, or $150. Therefore, his total earnings after 10 years will be $1,500. When the bond reaches maturity, Thomas will have received a total of $11,500—his initial $10,000 investment plus $1,500 in interest.
Stock up on domestic bonds with FlexiFonds
To stimulate the local economy and offer value to its investors, 70% of FlexiFonds mutual funds are made up of assets that are related to the local economy. These assets include:
- Bonds issued by the Québec Government
- Bonds issued by the Canadian Government
- Bonds issued by the Canada Housing Trust
Owning a variety of domestic bonds via a diversified portfolio with FlexiFonds is a great way to ensure your savings will remain stable. Not to mention the positive impact these investments have on our economy! Need more information about bonds? Don't hesitate to speak with one of our mutual fund advisors. They can help you make informed decisions.
FlexiFonds de solidarité FTQ Inc.
The units of the FlexiFonds funds are distributed solely in Québec by FlexiFonds de solidarité FTQ inc., a mutual fund dealer wholly owned by the Fonds de solidarité FTQ. FlexiFonds de solidarité FTQ inc. does not distribute the units of any other mutual funds. Management fees and other expenses may be associated with mutual fund investments. Please consult your advisor and read the prospectus and the fund facts documents before making an investment. The units of the FlexiFonds funds are not covered by the Canada Deposit Insurance Corporation nor any other government deposit insurer. The FlexiFonds funds are not guaranteed, their values change frequently, and past performance may not be repeated.
Information
All the information and data provided on this website are for information purposes only; they are not intended to provide advice or recommendations of a financial, legal, accounting or tax nature with respect to investments. Although they are deemed reliable, no representation or warranty, express or implied, is made as to the accuracy, quality or completeness of this information and data. The opinions expressed should not be construed as a solicitation or offer to purchase or sell the units referred to herein and should not be viewed as a recommendation. We recommend you consult your advisor.
