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?

<p>Federal Crown corporation bonds (D)</p> Signup and view all the answers

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

<p>Government of Canada bonds (C)</p> Signup and view all the answers

How often is interest paid on Government of Canada bonds?

<p>Semi-annually (C)</p> Signup and view all the answers

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

<p>Guaranteed by the federal government (A)</p> Signup and view all the answers

Which of the following statements accurately describes corporate bonds?

<p>They are backed by the corporation’s assets. (D)</p> Signup and view all the answers

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

<p>Steady flow of interest and principal payments (A)</p> Signup and view all the answers

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

<p>Prepayment risk from homeowners refinancing or selling (B)</p> Signup and view all the answers

How are strip bonds primarily valued?

<p>Based on the future principal amount's present value (C)</p> Signup and view all the answers

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

<p>It increases assuming interest rates stay the same (A)</p> Signup and view all the answers

What distinguishes real return bonds from traditional bonds?

<p>Par value is adjusted for inflation risks (B)</p> Signup and view all the answers

How often are coupon payments made on real return bonds?

<p>Semi-annually (B)</p> Signup and view all the answers

What is a significant consideration when investing in strip bonds?

<p>Tax planning is essential due to interest recognition (B)</p> Signup and view all the answers

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

<p>Investors in need of steady income, such as retirees (B)</p> Signup and view all the answers

Which statement about strip bonds is true?

<p>They are sold at a deep discount and may become more valuable over time (B)</p> Signup and view all the answers

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

<p>They can be traded in a secondary market (B)</p> Signup and view all the answers

What is the primary purpose of municipal bonds?

<p>To fund municipal projects (C)</p> Signup and view all the answers

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

<p>High-yield corporate bonds (C)</p> Signup and view all the answers

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

<p>They do not make coupon payments. (D)</p> Signup and view all the answers

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

<p>T-bills have the lowest yield. (D)</p> Signup and view all the answers

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

<p>Municipal bonds (B)</p> Signup and view all the answers

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

<p>They have lower yields due to lower risk. (D)</p> Signup and view all the answers

Why do municipalities offer higher yields for certain bonds?

<p>To compensate for higher default risk. (C)</p> Signup and view all the answers

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

<p>They are more likely to default compared to safer bonds. (C)</p> Signup and view all the answers

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

<p>Recognition of interest for tax purposes. (D)</p> Signup and view all the answers

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

<p>The needs of the corporation (D)</p> Signup and view all the answers

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

<p>They diversify the risk associated with high-yield bonds. (B)</p> Signup and view all the answers

What type of investment is a banker’s acceptance?

<p>A short-term debt security guaranteed by a bank (A)</p> Signup and view all the answers

Which financial information is typically disclosed for a corporate bond?

<p>Coupon rates and yields (A)</p> Signup and view all the answers

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

<p>They have the highest yield among similar investments. (B)</p> Signup and view all the answers

Flashcards

Government of Canada Bonds

Debt securities issued by the Canadian government. Their payments are guaranteed by the federal government, making them extremely safe investments. Issued with maturities ranging from 1 to 30 years and interest is paid semi-annually.

Federal Crown Corporation Bonds

Debt securities issued by corporations established by the Canadian government, such as EDC, CMHC, FCC, and BDBC. Their payments are also guaranteed by the federal government, offering a relatively safe investment.

Provincial Bonds

Debt securities issued by individual provinces in Canada. Payments are guaranteed by the issuing province, but risk of default can vary depending on the province's financial stability.

Municipal Bonds

Debt securities issued by local governments or municipalities. They are backed by the municipality's ability to raise revenues through taxes and fees.

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Corporate Bonds

Debt securities issued by companies to raise capital. Their payments are backed by the company's assets and earnings. They can offer higher returns but also carry higher risk of default.

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Marketable Bonds

Bonds that can be traded freely in the secondary market, allowing investors to buy and sell them before their maturity date.

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Callable Bonds

A feature of some bonds that allows the issuer to redeem the bond before its maturity date.

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Non-Callable Bonds

Bonds that cannot be redeemed by the issuer before their maturity date. The original investor is guaranteed to hold the bond until its maturity date.

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What are Mortgage-Backed Securities (MBSs)?

A pool of mortgages that are issued by banks and other financial institutions. The CMHC guarantees these mortgages in the event of default.

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How does an MBS work?

A guaranteed flow-through investment. Mortgage payments are flowed through to investors as principal and interest.

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What is a unique risk with MBSs?

Prepayment is more likely when interest rates fall or there is an active real estate market.

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What is a Strip Bond?

Long-term debt securities issued by the Government of Canada that don't offer coupon payments. Coupon payments are sold separately.

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How does the value of a Strip Bond change?

As it moves toward maturity, the present value of a strip bond should rise, assuming that interest rates remain the same. However, rates are not static and movement in interest rates affects strip bonds more than other bonds.

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What is a Real Return Bond?

Long-term debt securities issued by the Government of Canada that protect investors from inflation risk.

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How do Real Return Bonds work?

The par value of the bond is adjusted for changes in the inflation rate, as measured by the consumer price index.

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What happens at maturity for Real Return Bonds?

The accumulated difference between the inflation-adjusted coupon payment and the regular coupon payment is paid to the investor, along with the inflation-adjusted par value.

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How are interest payments calculated on Real Return Bonds?

The actual amount of interest paid during the year will be based on the initial par value.

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What are the advantages of Real Return Bonds?

A very safe investment that can be sold easily in the secondary market.

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Default Risk

The risk that a bond issuer will not be able to repay its debt obligations.

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High-Yield Municipal Bonds

Municipal bonds that offer a higher yield to compensate for the increased risk of the issuing municipality.

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High-Yield Bonds

Corporate bonds with a high default risk, often issued by companies with less stable financial performance.

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T-bills (Treasury Bills)

Short-term debt securities issued by the Canadian government and sold at a discount to par value.

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Banker's Acceptances (BAs)

Short-term debt securities issued by large firms and guaranteed by a bank.

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Commercial Paper

Short-term debt securities issued by large firms and guaranteed by the issuing firm.

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Bond Discount

The difference between the price an investor pays for a bond and its face value, expressed as a percentage of the face value.

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Bond Premium

The difference between the price an investor pays for a bond and its face value, expressed as a percentage of the face value.

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Yield to Maturity

The annual return an investor expects to earn from a bond if held until maturity.

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Coupon Rate

A bond's stated interest rate, usually paid semi-annually.

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Maturity Date

The date when a bond's principal amount is repaid to the investor.

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Investment Risk

The risk associated with an investment that may result in a loss of principal.

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High-Yield Bond Mutual Funds

Mutual funds that specialize in investing in high-yield bonds.

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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.

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