Bond

In finance, a bond is a negotiable certificate that acknowledges the indebtedness of the bond issuer to the holder. It is negotiable because the ownership of the certificate can be transferred in the secondary market. It is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal (face value) at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals (semi annual, annual, sometimes monthly).

Types

The following descriptions are not mutually exclusive, and more than one of them may apply to a particular bond.

• Conventional bonds (also called "nominal bonds"; mostly covers investment-grade Canadian bonds)
• Foreign bonds
• High yield bonds
• Real Return Bonds

Terminology

There is some important terminology used by the fixed-income industry:

• The issuer is the entity (company or govt.) who borrows an amount of money (issuing the bond) and pays the interest.
• The principal of a bond – also known as maturity value, face value, par value – is the amount that the issuer borrows which must be repaid to the lender.[1]
• The coupon (of a bond) is the interest that the issuer must pay.
• The maturity is the end of the bond, the date that the issuer must return the principal.
• The issue is another term for the bond itself.
• The indenture is the contract that states all of the terms of the bond.

Canadian investors can generally find a copy of the indenture (also known as the prospectus) from System for Electronic Document Analysis and Retrieval (SEDAR). A review of this document can be useful to understand all the terms of a bond you may be considering.

Creditor or borrower categories

There are four main credit or borrower categories in Canada:

• Federal bonds issued by the Government of Canada (including Crown Corporations),
• Provincial bonds (including provincially guaranteed securities),
• Municipal bonds,
• Corporate bonds.

As of June 1st, 2023, based on one of the main ETFs that track this index, the Federal (Canada and Crown Corporation) sector accounted for approximately 38% of the FTSE Canada Universe Bond Index. The Provincial sector was 35%, the Municipal sector was 2%, and the remaining portion was in the Corporate Sector.

Canada call feature

A Canada call issue is simply a bond which may be called back by the issuer to redeem the debt prior to the maturity date at an equivalent yield of a Government of Canada bond of the same maturity plus a premium (example, Canada call + 15bps). The holder of the bond is paid the calculated price (based on the yield plus the additional 15bps) or par whichever is higher. Typically there are not many doomsday calls redeemed before maturity as it is not advantageous for the issuer to do so. This feature is more commonly attached to corporate issues.

Indices

FTSE Canada Fixed Income (formerly PC-Bond / DEX) is the predominant provider of fixed income indices in Canada. It is best known for the Universe Bond Index.

Over 600 indices and sub-indices are offered. In addition to the FTSE Canada Universe Bond Index, the most common indices are:

• Short Term Bond Index, one to five years.
• Mid Term Bond Index, five to ten years.
• Long Term Bond Index, 10+ years.

See also

• Equities
• Fixed income
• Cash and cash equivalents
• Portfolio design and construction
• Asset allocation

External links

• PWL Capital, A Guide to Fixed-Income Investing, November 2019
• PWL Capital, Guide du placement dans les titres à revenu fixe, December 2019