Fixed Income FAQs

Have a specific question about fixed income products? Find answers to the most common questions here.

What is a bond?

A bond is a fixed income financial instrument that allows a government or corporation to borrow money from investors. It is typically issued at a set rate of interest over a specific period of time – from the date the bond is issued to its maturity date. The interest rate (or coupon) that is paid for this loan is determined by a variety of factors, such as the creditworthiness of the issuer and the prevailing rate of interest offered in the market at that point in time.

Bonds issued by governments typically pay a lower rate of interest than corporations because there is a lower risk that they will be unable to pay back the loan.

What are the benefits of investing in fixed income?

Fixed income investing can offer a number of benefits, such as providing a predictable source of income, helping to preserve capital and offering attractive diversification benefits to your portfolio.

Which fixed income products can I buy and sell through RBC Direct Investing?

We offer a wide range of fixed income products online, including:

• Guaranteed investment certificates (GICs) from all major Canadian institutions
• Government of Canada bonds
• Provincial and municipal government bonds
• Corporate bonds
• Strip coupons or residuals (government and corporate)
• Bankers’ acceptances
• Commercial paper
• Crown paper
• Government of Canada treasury bills (T-bills)
• Fixed income mutual funds and exchange-traded funds
• Money market funds
• Provincial savings bonds (PSBs), subject to availability, can be bought or sold over the telephone through one of our investment services representatives.
• Canada Savings Bonds are no longer offered but can be sold over the telephone through one of our investment services representatives.

What are the main differences between some of these fixed income products?

Guaranteed Investment Certificates (GICs)

• A GIC is a note issued by a bank or trust company with a fixed yield and term to maturity. Interest can be paid annually or can be compounded annually if the maturity exceeds one year.
• All guaranteed investment certificates (GICs) offered through RBC Direct Investing are insured by the Canada Deposit Insurance Corporation up to a maximum of $100,000 (principal and interest combined) per issuer per insured category – with the exception of Vancity Credit Union which has GICs insured by the Credit Union Deposit Insurance Corporation for an unlimited amount. In most instances, GICs are not redeemable prior to maturity.

Bonds

• Bonds are debt-instruments issued by governments or corporations that pay interest (usually semi-annually) and are held for a specified, fixed term.
• You can purchase a stated amount of a bond at par (eg. 100), at a discount (eg. 98), or at a premium (eg. 110) depending on the issue. The bond would mature at par. Typically, bonds with more attractive interest rates or better credit ratings will tend to trade at a premium while bonds of weaker quality will tend to trade below par.
• Bonds are not protected under CDIC insurance although all government bonds are backed by either the corresponding federal, provincial or municipal governments. Corporate bonds are not backed or secured by any government although bondholders do take precedence during insolvency proceedings over common and preferred shareholders.

Strip coupons and Residuals

• These instruments are purchased at a discount and mature at par and unlike bonds pay no interest. For example, a Canadian strip coupon maturing in 5 years with a yield of 6% would be priced at 74.72 and will mature at 100. Although this yield amount is not payable until maturity, it accrues each year and must be included as income on your income tax.
• In comparison with bonds, strip coupons eliminate reinvestment risk over the term of the investment by paying no cash flows until maturity. The price of a strip coupon will fluctuate more than the price of a bond of similar term and they may offer higher yields than bonds with similar terms and credit quality. The combination of these features makes them a popular choice for tax-sheltered accounts such as RSPs and RIFs.
• Strip coupons are not protected under CDIC insurance although all government bonds and strips are backed by either the corresponding federal, provincial or municipal governments. Corporate strip coupons are not backed or secured by any government although bondholders and strip coupon-holders do take precedence during insolvency proceedings over common and preferred shareholders.

Banker's Acceptances (B.A.s)

• These are short-term promissory notes issued by a corporation, bearing the unconditional guarantee (acceptance) of a major chartered bank.
• Typically, they are purchased at a discount and mature at par with the difference representing the yield to maturity (calculated as a %).
• Banker's acceptances offer slightly higher yields to T-bills and have higher quality and liquidity than most commercial paper issues.

Government of Canada Treasury Bills (T-Bills)

• These are short-term (one to 12 months) debt-instruments issued by, and fully backed by, the federal government.
• T-bills are purchased at a discount and mature at par with the difference representing the yield to maturity (calculated as a %).
• T-Bills can easily be sold prior to maturity and offer a competitive yield.

Read on about Types of Fixed Income.

What is Par Value?

Par value is the face value of a bond or a money market instrument. Par value may be different from what it costs you to purchase the item. 

For example: If the par value of a particular bond is listed at $10,000, but the market price is 99.70/$100, your cost to purchase that bond would be $9,970 (excluding accrued interest). 

When referring to guaranteed investment certificates (GICs), par value refers to the amount invested.

What is yield?

Think of yield as the return provided by a fixed income investment. The yield of a bond is based on both the purchase price of the bond and the interest (or coupon) payments received each year. Yield is often the term used to describe long-term interest rates.

Yield = Coupon/Bond Purchase Price

A bond's yield is influenced by the current market climate, meaning how much investors can demand for lending money to an issuer for a specified period of time. The yield of a bond is also based on the price paid for the bond, its coupon and the bond's term-to-maturity. 

When it comes to the price of a bond, this can be impacted by a number of factors, including: 

• the creditworthiness of the issuer
• the overall economic outlook and inflation rate and
• changes to interest rates set by central banks.

A bond's yield and price have an inverse relationship, meaning they move in opposite directions. 

So, when yields rise, bond prices fall. And when yields fall, bond prices rise. 

What is duration?

Duration measures a bond's sensitivity (or how much a bond is likely to fluctuate in price) to a one percent change in interest rates in either direction. While duration is stated as a measure of time (years) it is often used to compare a bond to a benchmark or similar bonds when assessing risk. Generally, the higher the duration number, the more sensitive a bond investment is to a change in interest rates. Conversely, the price of a bond with lower duration is less sensitive to changes in rates.

How do I find a particular fixed income product?

The fixed income search tool found on the Fixed Income Screener page allows you to find a fixed income product tailored to your needs. The basic fixed income search lets you search by product, type (such as corporate or municipal), maturity date and par (face) value. With the advanced search, you can add criteria such as yield, coupon and price.

What is a credit rating?

A credit rating is an assessment of a company’s or government’s ability to repay the debt it has issued in the form of a fixed income product. The lower the credit rating, the higher the risk of default. Generally, bonds with lower credit ratings pay a higher coupon (interest payments) to compensate investors for the increased risk.

Ratings are provided by Standard & Poor's (S&P), Moody's and the Dominion Bond Rating Service (DBRS).

Learn more at credit and how bonds work at Fixed Income: The Basics. 

What does it mean to have a special term on a bond, and what are the most common special terms?

A special term is a feature not found on a conventional bond that may affect your investment. To see if a bond has special terms, open a detailed quote. Special terms you may see include:

• Callable/redeemable: The issuer can redeem the bond prior to its maturity. If the bond is called, you will usually receive a price slightly higher than the face (or par) value, plus any accrued interest.      
• Puttable/retractable: You have the right to receive the par value or other specified amount of the bond at a predetermined point in time before maturity. There may be more than one retraction date, with different retraction prices.
• Canada/doomsday call (e.g., "Call D+15" or "D-15"): The issuer has the right to call back the bond at any time prior to maturity at a floating yield based on the equivalent Government of Canada (GOC) bond yield. The "+ or -15" refers to the basis points paid over or deducted from the GOC bond yield. You will then receive the calculated price, or par, whichever is higher.
• Fixed floater bonds ("FF"): These are callable bonds issued by Canadian banks and insurance companies. They offer a fixed coupon up until their call date, which is usually five or 10 years before the date of maturity. If the bond is not called (at par), the issuer then pays a coupon based on a pre-specified spread over the floating banker's acceptance rate, or another short-term rate.
• "Synthetic" bonds: These are semi-annual Government of Canada bonds created by RBC Capital Markets by using the cash flows from other stripped Canada issues. Because the product is essentially a Canada bond, it ranks equally with all other Government of Canada obligations. However, since the size of the issue is much smaller, it does not have the same liquidity as a regular Government of Canada bond.
• Convertible bonds: The investor has the right to convert the bonds into shares of the same company. The privilege will include the specific series of shares, the conversion ratio, period and price. The value of this feature will depend on the value of the underlying shares.
• Monthly pay: Interest payments are made monthly as opposed to the standard semi-annual payment.
• No RSP: This issue is ineligible for registered accounts.
• Non-standard settlement dates (e.g., "APR 2 SD"): The quoted date will be used as the settlement date, as opposed to the standard three-day (or two-day) settlement.

Do bonds restrict the amount of debt a company can hold?

Many, but not all, bonds include covenants or rules that limit the amount of debt an issuing company can hold. Such limits are important to bondholders because companies that increase their debt also increase their interest payments. If a company cannot meet its debt obligations, the value of its existing bonds will decrease. It is important to read and understand bond covenants before making an investment.

How easily can I buy and sell fixed income investments?

Fixed income markets are very large, and fixed income products are generally very liquid (easy to buy and sell) though is depends on the credit (quality) of the issuer, size of the issue and demand for the product. From time to time, liquidity may be impacted by an issuer’s questionable ability to meet its required coupon payments or prevailing market conditions may affect demand. Generally the higher the credit rating, the bigger the issue, the less risk there is of liquidity concerns.

See Fixed Income Order FAQs for information on buying and selling fixed income.