Bond Types Overview

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Questions and Answers

Which type of bonds are guaranteed by the federal government and have a term to maturity of between 1 and 30 years?

Provincial bonds

Municipal bonds

Corporate bonds

Government of Canada bonds (correct)

What is a key characteristic of Federal Crown corporation bonds?

Have a term to maturity of over 15 years

Interest is paid annually

Guaranteed by the federal government (correct)

Issued exclusively by private corporations

Which type of bond is specifically issued by provincial governments?

Corporate bonds

Municipal bonds

Provincial bonds (correct)

Federal Crown corporation bonds

What type of bond typically offers a higher return than Government of Canada bonds?

Federal Crown corporation bonds Signup and view all the answers

Which of the following types of bonds is referred to as non-callable?

Government of Canada bonds Signup and view all the answers

How often is interest paid on Government of Canada bonds?

Semi-annually Signup and view all the answers

What is the main reason Government of Canada bonds are considered very safe?

Guaranteed by the federal government Signup and view all the answers

Which of the following statements accurately describes corporate bonds?

They are backed by the corporation’s assets. Signup and view all the answers

What is a primary benefit of mortgage-backed securities (MBSs) for investors?

Steady flow of interest and principal payments Signup and view all the answers

What unique risk is associated with mortgage-backed securities (MBSs)?

Prepayment risk from homeowners refinancing or selling Signup and view all the answers

How are strip bonds primarily valued?

Based on the future principal amount's present value Signup and view all the answers

What happens to the present value of a strip bond as it approaches maturity?

It increases assuming interest rates stay the same Signup and view all the answers

What distinguishes real return bonds from traditional bonds?

Par value is adjusted for inflation risks Signup and view all the answers

How often are coupon payments made on real return bonds?

Semi-annually Signup and view all the answers

What is a significant consideration when investing in strip bonds?

Tax planning is essential due to interest recognition Signup and view all the answers

What type of investors are typically attracted to mortgage-backed securities (MBSs)?

Investors in need of steady income, such as retirees Signup and view all the answers

Which statement about strip bonds is true?

They are sold at a deep discount and may become more valuable over time Signup and view all the answers

What is a common characteristic of all the mentioned investment types?

They can be traded in a secondary market Signup and view all the answers

What is the primary purpose of municipal bonds?

To fund municipal projects Signup and view all the answers

Which type of bond is known to have the highest potential for default?

High-yield corporate bonds Signup and view all the answers

Which feature differentiates T-bills from other short-term debt securities?

They do not make coupon payments. Signup and view all the answers

How are yields to maturity of T-bills compared to BAs and commercial paper?

T-bills have the lowest yield. Signup and view all the answers

Which of the following bond types is typically issued by local government agencies?

Municipal bonds Signup and view all the answers

What characteristic is common to corporate bonds issued by more stable companies?

They have lower yields due to lower risk. Signup and view all the answers

Why do municipalities offer higher yields for certain bonds?

To compensate for higher default risk. Signup and view all the answers

For what reason are high-yield bonds considered risky investments?

They are more likely to default compared to safer bonds. Signup and view all the answers

What is one of the potential risks associated with T-bills despite being a safe investment?

Recognition of interest for tax purposes. Signup and view all the answers

What can influence the terms and conditions of a corporate bond?

The needs of the corporation Signup and view all the answers

What is one reason why most individual investors should consider mutual funds for high-yield bonds?

They diversify the risk associated with high-yield bonds. Signup and view all the answers

What type of investment is a banker’s acceptance?

A short-term debt security guaranteed by a bank Signup and view all the answers

Which financial information is typically disclosed for a corporate bond?

Coupon rates and yields Signup and view all the answers

How do yields of commercial paper compare to other short-term securities?

They have the highest yield among similar investments. Signup and view all the answers

Study Notes

Bond Types

Bonds are categorized by issuer:
- Government of Canada bonds: Issued by the Canadian government, these bonds are guaranteed by the government, minimizing default risk. Maturities range from 1 to 30 years with semi-annual interest payments. They are marketable (can be sold in the secondary market).
- Federal Crown corporation bonds: Issued by government-owned corporations like EDC, CMHC, FCC, and BDBC. Guaranteed by the federal government, offering slightly higher returns than government bonds. Maturities are 2-10 years.
- Provincial bonds: Issued by provincial governments, interest and principal payments are guaranteed by the issuing province. Risk varies by province. Maturities are 1 to 30 years.
- Municipal bonds: Issued by local government agencies to fund municipal projects. Risk of default can vary, with higher risk bonds offering higher yields to attract investors. Generally less common for individual investors.
- Corporate bonds: Issued by corporations, not backed by the federal government, so default risk is possible. Risk varies significantly among corporations, with those judged stable having lower risk ("high-yield" bonds are higher risk). High-yield bonds often offer higher returns but are riskier, better suited for investors in bond mutual funds. Terms depend on the corporation's needs.

Bond Quotations

Corporate bond quotations are available in financial publications and online. Examples include data on Enbridge Pipeline Inc. bonds with coupon rates of 6.55% payable semi-annually, maturing in November 2027, and trading at 127.06 (premium). This represents a yield of 3.64% for investors.

Short-Term Debt Securities

T-bills: Short-term debt securities from Canadian governments, sold at a discount with no coupon payments. Lowest risk and yields.
Banker's Acceptances (BAs): Short-term debt securities from large firms, guaranteed by a bank. Riskier than T-bills, but safer than commercial paper.
Commercial paper: Short-term debt securities from large firms only guaranteed by the issuing firm. Highest risk among these three.

Other Fixed-Income Products

Mortgage-backed securities (MBSs): Represent pools of CMHC-insured residential mortgages, guaranteed by CMHC. Steady flow of interest and principal payments, slightly higher yield than government bonds. Risk of prepayment(refinancing or sale of homes) exists.
Strip bonds: Government bonds with coupon payments separated and sold separately. Very safe default-wise but vulnerable to interest rate changes, offering very deep discounts.
Real return bonds: Government bonds protecting against inflation risk by adjusting par value and coupon payments based on the consumer price index. Coupon payments and par value increase with inflation to compensate for the inflation rate.

Additional Info

Junk bonds: High-risk, high-yield bonds generally not recommended for most investors.
Money market funds (MMFs): Invest in short-term securities like T-bills, banker's acceptances, and commercial paper. Ideal for investors seeking short-term debt exposure.
Tax Planning: Important consideration for purchasing short-term or strip bonds outside registered accounts (RRSPs, TFSAs, RESPs) due to interest recognition.

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Description

Explore the various types of bonds in this quiz. Learn about government bonds, federal crown corporation bonds, provincial bonds, municipal bonds, and corporate bonds. Each category's features, risks, and returns will be highlighted.