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What Are Fixed Income Securities and Investments in Canada?

Fixed-income securities are debt instruments issued by governments, companies, and other entities with a promise to pay the investor (lender) a fixed interest amount on scheduled dates and to pay back the principal at maturity.

There are many kinds of fixed-income products, the most popular being bonds.

One main similarity between securities in this class of investment assets is that investors know beforehand how much to expect in interest payments (returns), and when to expect the payments.

Also, an investor in fixed income securities can expect to receive their original investment (principal) back on its maturity date.

Types of Fixed Income Securities

The common types of fixed income securities and their features include:

1. Bonds

The term “bonds” encompasses investments in which an investor loans money to an entity (government, corporation, etc.) at a predetermined interest rate and length of time. Examples of bonds are:

Government bonds: These bonds are issued by a sovereign or federal government.

Provincial/Municipal bonds: These are issued by a province, state, city, or municipality.

Corporate bonds: Corporate bonds are issued by a company or business.

Savings bonds: Are issued by a federal or provincial authority.  For example, Canada Savings Bonds (CSB) issued by the Government of Canada, and the Ontario, Manitoba, and Saskatchewan Savings Bonds issued by the respective provincial governments.

The federal government ceased the issuing of new CSBs in 2017. Savings bonds are a bit different from standard bonds in a few ways – including that they can only be bought by residents, and are available in much smaller denominations.

Government-issued bonds are considered less risky than other bonds and may sometimes be referred to as “risk-free.”

This is because these bonds are backed up by the “full faith and credit” of the sovereign government and the probability of default on payments (interest and principal) is close to zero.

Government of Canada bonds are available in denominations starting at $5,000 and can be purchased in multiples of $1,000.

Bonds are issued with terms as short as 1 year and up to 30 years or longer. Interest payments are made semi-annually (i.e. every 6 months).

Related: Best Brokerage Accounts in Canada

2. Money Market Instruments

These are similar to bonds but have significantly shorter terms – as short as 30 days.

Money market instruments have an active secondary trading market (i.e. are highly liquid) and are generally considered low-risk investments.

Examples include Government of Canada Treasury Bills, Commercial Paper, Bankers’ Acceptances, and Bank Deposit Notes.

Treasury Bills (T-Bills)

These are issued by Federal and Provincial governments and are considered to be very low-risk. They are available with maturities of 1, 2, 3, 6 months, and up to 1 year.

T-bills issued by the Government of Canada are rated AAA and are considered one of the safest investments you can make.  They are offered with face values of $5,000, $10,000, $25,000, and and in multiples of $1,000 up to $1 million.

T-bills are sold at a discount with the expectation that they will reach face value at maturity. This means that your return is the difference between the purchase price and the price at maturity (i.e. the face value).

For example: If you buy a 182-day T-bill with a face value of $5,000 at $4,500 and hold it till maturity, your interest payment (return) would be $500.

Because they are very safe, the return on Treasury bills is lower than for many other securities.

Bankers’ Acceptances

These are short-term debt instruments issued by a corporation and fully guaranteed by a bank. Like T-bills, bankers’ acceptances are sold at a discount and maturity is usually less than 1 year.

Bankers’ acceptances can be traded prior to maturity, and are not insured by Canada Deposit Insurance Corporation (CDIC).

Commercial Paper

This is a short-term debt issued by a corporation to raise cash for funding its business operations.

A commercial paper is backed by the company issuing the debt and usually comes with very short maturities – 30 days or less. They are also sold at a discount (like T-bills) and can be traded on the secondary market prior to maturity.

A commercial paper is considered to be riskier than T-bills and bankers’ acceptances and is not insured by CDIC.

Related: Best Savings Rates in Canada

3. Guaranteed Investment Certificate (GIC) and Term Deposits

GICs are like a savings account, but with restrictions on when you can withdraw your deposit. They usually offer slightly better interest rates than a standard savings account.

There are many types of GICs – traditional GICs offer you a fixed interest rate that is paid on specific dates, or at maturity. At maturity, you get your principal back.

GICs have maturity terms of a few months to several years.

Deposits in a GIC are guaranteed by CDIC (up to $100,000) per person per eligible financial institution.

Related: Understanding GICs

4. Mortgage-Backed Securities

Mortgage loans may be pooled by a government agency (e.g. Fannie Mae and Freddie Mac), investment banks, and other lenders and then securitized by selling shares to investors. These shares are referred to as mortgage-backed securities (MBS).

In Canada, pooled insured residential mortgages are referred to as NHA Mortgage-Backed Securities as per the National Housing Act and are backed by the Canada Mortgage and Housing Corporation (CMHC).

What this backing means is that investors are guaranteed to receive their interest payments and principal even if some of the mortgage owners in the pool default.

Unlike bonds, investors in an NHA MBS receive monthly payments that are a combination of principal and interest. NHA MBS is considered a very safe investment.

Features and Benefits of Fixed-Income Securities

Regular Income: Regular interest payments generate a predictable stream of income.

Low Risk: They are less risky than stocks, particularly when issued by a government.

Portfolio Diversification: They can lower the risk or volatility faced by an investment portfolio that contains other riskier assets like stocks. Also, bonds may react differently to market fluctuations, such as going up when stocks are going down.

Capital Preservation: Your principal is paid back at maturity, unless of course if the issuer goes belly-up.

Related reading:

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Gravatar for Enoch Omololu, MSc (Econ)
Enoch Omololu, MSc (Econ)

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch is passionate about helping others win with their finances and has been writing about money matters for over a decade. He has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, CBC News, Financial Post, Toronto Star, CTV News, Canadian Securities Exchange, Credit Canada, National Post, and many other personal finance publications. You can learn more about him on the About Page.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO, monitors his credit score for free using Borrowell, and earns interest on savings through EQ Bank.

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