Government Bonds

Government bonds are interest-bearing securities that are issued by Federal, Provincial and Municipal governments across Canada. Governments issue bonds to fund long-term capital works projects and budget deficits.

When an investor buys a Government bond he/she is making a loan to the issuing government body. The government promises to repay the investor on the maturity date, and in the meantime, to pay interest at a set rate on specified dates, usually semi-annually. For example, a $1000 face value bond with a 10 percent coupon pays $100 income annually in two semi-annual payments of $50.

While the coupon rate of your bond investment does not change, the current yield and price of your security may change over time. This is important to understand if you do not plan to hold your bond to maturity. Interest rates fluctuate daily and the current yield of your bond will change to reflect a proper relationship to the whole spectrum of debt securities in the actively traded Canadian Bond market.

When interest rates fall, bond prices rise. This Interest Rate/Bond Price relationship varies, however, with the coupon rate and maturity of a bond. A change in interest rates will have a greater impact on a bond with a lower coupon and a longer term to maturity than a bond with a higher coupon and a shorter term to maturity. For example, a 30-year bond with an 8% coupon will move about half a point in price to reflect a 5-basis-point change in yield; while a 3-year bond with an 8% coupon will only move one-eighth of a point in price to reflect a 5-basis-point change in yield.