Beginner's guide to bond investing in Canada
In this article, you’ll learn the basics of investing in bonds, along with the benefits and risks
CIBC Investor’s Edge
May. 30, 2025
7-minute read
A bond is a type of fixed income investment. But what is a fixed income investment?
Fixed income investments are designed to provide regular interest payments and are often used for income and stability in a portfolio. They work by paying you interest in exchange for keeping your money invested over a set period of time, with the full amount typically returned to you at the end. Fixed income can play a useful role during periods of uncertainty or market volatility, helping to balance out the ups and downs of more aggressive investments like stocks.
Bonds are one of the most common types of fixed income investment. They come in many forms, making them a useful way to explore the key ideas behind fixed income investing. Other well-known fixed income products include Guaranteed Investment Certificates (GICs) and money market funds.
A bond is sold or issued by a government, company or other entity. When you buy a bond, you're lending money to that entity. In return, the issuer promises to:
- Pay you regular interest — usually once or twice a year, although some bonds pay interest only at maturity.
- Return your original investment — called the principal — at a specific future date — called the maturity date.
The bond’s face value is the amount the bond issuer agrees to pay at maturity, and the bond’s term is the length of time the money will remain invested.
Bonds can be classified in several ways. Two of the most common classifications are:
- By issuer: Government of Canada bonds, provincial bonds and corporate bonds are examples.
- By credit rating: Examples include investment-grade bonds that have strong credit ratings and high-yield bonds — also known as junk bonds — that have lower ratings and carry a higher risk of default.
What are the benefits of investing in bonds?
Steady income
Many bonds pay regular interest on specific dates, and the amount is often known in advance. This is helpful for budgeting or planning cash flow.
Lower volatility versus stocks
Bond prices tend to be less volatile than stock prices. How important this is often depends on whether or not you hold the bond to maturity.
If you plan to hold a bond to maturity, price swings may be less significant for you, since you’ll receive the bond’s face value at that time.
However, if you are trading bonds, you may be more concerned about price fluctuations, because you may want to sell your holdings before maturity, and the market price at that time will directly affect your returns. Similarly, holders of bond mutual funds or exchange traded funds (ETFs) are affected by price fluctuations, because the net asset value (NAV) or price of the fund can decrease when bond prices fall, negatively affecting the overall value of your investment.
Stability in uncertain times
During stock market downturns and uncertain economic periods, investors often move money from stocks to bonds, reinforcing bonds’ reputation as a safer haven.
What are the risks of investing in bonds?
Bonds are generally less risky than stocks, but they’re not risk-free. Here are four key risks to understand.
Rising interest rates
When interest rates rise, newly issued bonds offer higher rates than existing bonds. This makes existing bonds less attractive, and their market prices will adjust to the downside to compensate.
Let’s illustrate with a simplified example to show the concept.
You buy a $100 one-year bond paying $5 or a 5% yield.
Tomorrow, interest rates rise dramatically, and a newly issued one-year bond of the same type now offers 6%.
To adjust, your bond’s market price drops to about $99.06, which then produces a 6% yield for a buyer of your bond. This is because that buyer will receive:
- the $5 interest payment
- a gain in the value of the bond itself. They bought the bond from you at $99.06, but they will receive $100 — the bond’s face value — at maturity, a gain of $0.94.
Inflation
If inflation rises, your bond's fixed return may lose buying power. Inflation also increases the chances that central banks will raise interest rates, which puts more downward pressure on bond market prices.
Credit rating downgrades
If a bond issuer's financial position deteriorates — whether the issuer is a country or a company — their credit rating may be downgraded, leading to a decline in the bond’s market price. While the likelihood is low, a credit downgrade increases the risk of missed payments or default. It may also make it harder to sell or trade the bond.
Bond default
A bond default happens when an issuer can’t make an interest payment or repay the bond on time. This might happen due to financial trouble, a weak economy or unexpected setbacks.
Defaults don’t always mean bankruptcy. Some issuers recover by restructuring their debts. But even without bankruptcy, a default can cause a bond’s value to drop, and investors may not get all their money back.
If bankruptcy does occur, bondholders are ahead of shareholders when it comes to claiming what’s left — but even then, repayment isn’t guaranteed. That’s why it’s important to keep an eye on the financial health of the issuers you invest in.
Should you buy individual bonds, bond mutual funds or ETFs?
While it’s important to understand how bonds work, many investors today don't buy individual bonds directly. Instead, they often invest through bond mutual funds or ETFs.
Buying individual bonds can present some challenges. Many bonds have higher minimum investment requirements — often at least $1,000 — making it harder to diversify across issuers and sectors unless you have a larger amount to invest. Some individual bonds are not very liquid and can be difficult to buy or sell quickly, limiting your flexibility. In addition, the price you pay for a bond often includes a built-in dealer markup that represents the dealer’s commission. Finally, buying individual bonds requires doing your own research on issuers’ creditworthiness and understanding the bond’s terms, which can be time-consuming and complex.
In contrast, bond mutual funds and ETFs allow you to invest in a wide range of bonds with a much smaller initial investment. They offer instant diversification and easier, more convenient market trading.
Bond mutual funds and ETFs typically charge management fees, which can range from about 0.1% to 1% or more annually. Trading commissions may also apply, depending on how and where you buy this product. Bond mutual funds may also charge a short-term trading fee of about 1% to 2%, if you buy and sell or switch the fund within a short time period — typically up to 30 days. Check the fund prospectus or product description for details.
Which style of bond fund or ETF should you select?
There are two main styles of bond mutual funds and ETFs, both managed by professional portfolio managers.
Managers of actively managed bond mutual funds and ETFs conduct research, make allocation decisions and adjust holdings based on changing market conditions.
Passively managed bond mutual funds and ETFs simply track a bond index, with managers focused on keeping the fund’s performance closely aligned with the index, rather than trying to outperform it.
While you give up some control compared to selecting individual bonds yourself, bond funds and ETFs can be a more accessible and convenient way to invest in fixed income, if you’re willing to incur the management fee.
Whichever approach you choose, understanding the basics of how bonds work helps you make more informed, confident decisions.
