Bonds in TFSA’s
Bonds are quite popular for those who want or need to live off their investment income. Bonds can provide a decent supply of steady income through fixed interest rates and guaranteed principal, similar to GICs. In essence you can think of a bond as an “IOU”. The main difference is that the value of a bond can fluctuate wildly. You can take advantage of this by selling them early and forfeiting the interest, and still potentially making a profit.
These are the bonds you typically invest in with a large bank. These consist of many different type of bonds with varying types, terms, and yields, which means you can have a nicely diversified portfolio and lower your overall risk. However, bond funds typically have high management expense ratios (MERs) as they are a type of mutual fund. MERs can be up to 3.4%, so unless your mix includes some high-yield bonds you may end up losing money over the long term.
Canada Savings Bonds and Canada Premium Bonds
Since 2012 Canada Savings Bonds were only available through your payroll savings program and couldn’t be directly transferred to a TFSA (you could however redeem them first, and then transfer them). As of November, 2017, the Government of Canada discontinued the sale of Canada Premium Bonds. If you still hold these bonds, it’s recommend that you immediately cash them in at your financial institution.
These types of bonds have been issued by companies as a way of raising money for their business. Because these are issued by the companies themselves and not a financial institution, they are not insured by the Canada Deposit Insurance Corporation. So if the company goes bust those bonds could be worth zero. Invest in a corporate bond with a reputable credit rating.
Most of the major banks have options where you can purchase bonds directly online:
- Government-issued bonds: Available at the federal, provincial, and municipal level. A low risk investment.
- Strip bonds: The principal and interest have been separated and sold individually so interest is compounded. A higher risk investment since the interest is not paid until maturity and prices could fluctuate.
- Crown Corporate bonds: Generally have higher yields due to increased risk, depending on the entity’s credit-worthiness.
So long as you keep the bonds until maturity and the financial institute is insured by the Canada Deposit Insurance Corporation, your principal and interest are guaranteed.
What to watch out for
Generally the minimum investment in bonds is $5000. Ask about any maintenance or transfer fees as this will affect your bottom line when calculating your profits (or losses).
If you want to invest in bonds with an independent financial broker such as Questrade, be aware that their bond principals are not guaranteed. And if you are purchasing corporate bonds online, do your homework to ensure you are dealing with an entity with a high credit rating…these ones are unlikely to go under anytime soon, taking your money with them!