Debt Securities
Here are the main debt securities :
- Treasury bills
- Guaranteed investment certificates (GICs)
- Savings bonds
- Bonds and debentures
- Principal-protected notes
Treasury bills
Treasury bills (T-bills) are issued by the federal and provincial governments. They consist of loans granted by investors to issuersAn issuer is a company that offers securities, such as shares, to the public in exchange for funds that it will use to improve its financial situation, carry out projects or develop new markets. . Treasury bills are sold in denominations of $1,000, and are issued for a term of one year or less.
Expected return:
Treasury bills (T-bills) are issued by the federal and provincial governments. They consist of loans granted by investors to issuers. Treasury bills are sold in denominations of $1,000, and are issued for a term of one year or less.
Liquidity:
T-bills can generally be easily sold before maturity.
Risk:
Very low: There is practically no risk of default of payment because they are guaranteed by the governments that issue them. Since T-bills are short-term securities, the risk of major swings in the market value due to interest rate changes is limited.
Guaranteed investment certificates (GICs)
Short- and long-term investments guaranteed by a financial institution
With GICs, investors lend money to a financial institution that pays them interest in return. The interest may be regular interest (received by the investor at regular intervals) or compound interest (received by the investor only at maturity).
Terms range from 30 days to 10 years.
At maturity, the financial institution repays the initial purchase value of the guaranteed investment certificate.
Expected return
The interest rate is usually fixed until maturity.
The return on an index-linked GIC, however, is tied to the performance of an index—e.g., the S&P/TSX 60 Index, which tracks the stock market values of 60 large Canadian companies.
Liquidity
Most GICs must be held until maturity. However, some may be redeemed upon request. Penalties may apply.
Risk
Very low. GICs are guaranteed by the institution that issues them. Furthermore, GICs issued by a deposit institution authorized by the AMF are generally covered under the deposit protection plan if the deposit institution goes bankrupt. Another protection plan could apply if they are issued by another institution.
Savings bonds
Savings bonds are issued in several forms by the federal government and the governments of certain provinces. They represent loans granted by investors to issuersAn issuer is a company that offers securities, such as shares, to the public in exchange for funds that it will use to improve its financial situation, carry out projects or develop new markets. . Terms are one year or more.
Expected return:
The majority of savings bonds with regular or compound interest offer a fixed annual rate of return until maturity or a minimum rate of return that can be increased by the issuer if market conditions change. There are also tiered-rate savings bonds (regular and predetermined increase in the rate).
Liquidity:
Savings bonds cannot usually be sold or transferred to another person. Some can be redeemed by the holder at any time, while others can be redeemed only at specific intervals or only at maturity.
Risk:
Very low: They are guaranteed by the government issuer.
Bonds and debentures
Bonds are issued by governments and companies and represent loans granted by investors to issuersAn issuer is a company that offers securities, such as shares, to the public in exchange for funds that it will use to improve its financial situation, carry out projects or develop new markets. . In general, the issuer promises to pay a fixed interest rate (coupon rate) to the investor at certain intervals and pay back a predetermined amount at maturity: the face value. The face value is often a multiple of $1,000. Bonds can be traded at a price above or below their face value. Corporate bonds are generally backed by specific assets. The term is generally from 1 to 30 years. Some bonds, known as convertible bonds, can be exchanged for shares by the investor at his option.
Strip bonds (or zero couponA coupon is the interest portion of a bond that the issuer pays to the investor. bonds) are bonds whose coupons have been separated. The remainder of the bond (the principal) and the interest portion are discounted and sold separately. The principal is paid at maturity. The difference between the purchase price and the amount paid back at maturity corresponds to the interest income.
Debentures are similar to bonds, except that they are not backed by specific assets.
Expected return:
The return is in the form of interest or capital gains (losses) realized at maturity or at the time of sale. The majority of bonds and debentures provide for regular interest payments until maturity or minimum interest payments that can be increased by the issuer if market conditions change.
The market value of a bond varies according to changes in interest rates and the issuer’s credit rating. If interest rates fall, for example, the market value of a bond will rise because the interest payments provided by the bond become more attractive to investors. Value also depends on changes to the issuer’s credit rating.
Note: The rate of return on a bond or a debenture depends on the price paid at the time of purchase and the time left until maturity. For example, a debenture with an interest rate of 6% will pay a return of $60 per year for each multiple of $1,000 (face/par value). If you purchase the debenture for $950, your return will be higher than 6%.
Some bonds allow the company that issued them to buy them back.
Sensitivity to changes in interest rates
In general, bond coupons with a lower rate or a longer term to maturity are more sensitive to changes in interest rates (their value is affected to a greater degree).
Conversely, bond coupons with a higher rate or a shorter term to maturity are less affected by changes in interest rates (their value is affected to a lesser degree).
Liquidity:
Bonds are sold on over-the-counter marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. No secondary market may be available if the issuer experiences financial difficulties. Some bonds may be redeemable by the issuer.
Risk:
Low to high: A rise in interest rates or financial difficulties for the issuer will lower the value of the bonds.
The inflation rate could eventually be higher than the return you earn from a bond. If you hold a bond paying 2% interest and inflation reaches 3%, your return is negative (-1%), when adjusted for inflation. For more information, see the section on inflation and its impacts on your finances.
Should the issuer be dissolved, bonds and debentures entitle holders to a portion of the issuer’s remaining assets, ahead of shareholders.
Principal-protected notes
Principal-protected notes are securities whereby the issuerAn issuer is a company that offers securities, such as shares, to the public in exchange for funds that it will use to improve its financial situation, carry out projects or develop new markets. recognizes a debt. The term is usually between 5 and 10 years. At maturity, the issuer agrees to pay back the principal to investors. These securities do not necessarily carry a fixed interest rate, and their return can fluctuate on the basis of the benchmark portfolio, which can in turn be tied to several indexes, commodities, currencies, hedge funds, etc.
Expected return:
If sold before maturity, the return will consist of capital gains (losses). Otherwise, the return consists of interest. The return may be tied to the performance of a stock, bond, commodity or currency index.
The return on some notes may be tied to hedge fund returns. Some notes guarantee a rate of return for certain years, for example the first year only.
Liquidity:
A secondary marketA secondary market is a market where securities (such as shares and bonds) that were previously issued are bought and sold between investors. Exchanges and over-the-counter markets are secondary markets.
Securities that are issued for the first time, such as new shares issued by a company, are traded on the primary market. for principal-protected notes is usually maintained by the financial institutions that issue the notes.
Risk:
Medium: Principal-protected notes are usually guaranteed by a financial institution. However, the guarantee does not apply if the note is redeemed before maturity, which is usually between 5 and 10 years. Since the return on these notes is tied to underlying interests, there is a risk that the interest paid will be less than expected or that there will be no interest payments at all. In some cases, the issuer may limit the return on a note and/or redeem it before maturity.
Guaranteed investment certificates (GICs)
GICs are certificates of deposit issued by financial institutions. They represent loans granted by investors to issuersAn issuer is a company that offers securities, such as shares, to the public in exchange for funds that it will use to improve its financial situation, carry out projects or develop new markets. . Terms range from 30 days to 10 years.
Expected return:
Guaranteed investment certificates generally earn a fixed interest rate up to maturity. They either bear compound or regular interest (paid to the investor on a regular basis). There are also some GICs where the return fluctuates based on the performance of an index such as a stock index (index-linked GIC).
Note: The return of a stock market index measures the performance of a predetermined group of securities that are listed on an exchange.
Liquidity:
Most GICs must be held until maturity, but some can be redeemed upon request. Penalties may apply in such cases.
Risk:
Very low to medium: As a general rule, they are guaranteed by the issuer. With respect to index-linked GICs, they may or may not be guaranteed. The capital can also be insured by deposit insurance, in the event of bankruptcy of the issuer (some restrictions apply). GICs that carry terms of more than five years and are non-redeemable are not covered by deposit insurance.
