How To Buy Bonds: A Primer for New Investors (2023)

Learning how to buy bondsis an essential part of your education as an investor. A well-diversified investment portfolio should strike a balance between equities and fixed income, letting you ride out volatility while capturing growth along the way. In Canada, you can buy bonds through your brokerage account, or you can purchase bonds directly from the issuing government or corporation. Let’s take a closer look at the basics of buying bonds.

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What are Bonds?

Bonds are similar to stocks, in that they are issued by corporations or governments to raise funds for business operations. However, in the case of bonds, you are lending money to a business or the government. A simple way to think of a bond is like a loan, but you are the lender—you give the issuer money and the issuer pays the investor interest and, eventually, the entirety of the principal balance.

Why Invest In Bonds?

Bondstend to offer a reliable cash flow, which makes them the good investment option for income investors. A well-diversified bond portfolio can provide predictable returns, with less volatility than equities and a better yield than money market funds. Even when interest rates are low, bond investing options like high-yield debt or emerging market bondscan meet an investor’s need for income, although with substantially more risk.

“The purpose of fixed-income investments is to adddiversificationto a portfolio,” says Rich Powers, Head of ETF Product Management at Vanguard. “If you look at the return of the U.S. stock market this year, stocks are down roughly 13%. U.S. investment-grade bonds are up a little more than 4.5%. That’s important because if an investor holds a balanced portfolio of stocks and bonds, that helps them have a less volatile investor experience.”

Types of Bonds

There are a variety of types of bonds available to Canadians. These are broken down by the entity that issues them. Here are a few of the main types of bonds.

Government Bonds:

These types of bonds are issued by the Canadian Federal Government and are one of the most safe investments you can make. Secured by the government, payment of the principal and interest are guaranteed. You will also receive interest payments twice per year and you can see government bonds at market value on any business day.

Provincial and Municipal bonds:

These types of bonds are issued by provincial or local governments to fundraise for projects specific to their community (for example, to build a new school or repair a road). They are considered very stable, but less so than government bonds.

Corporate Bonds

When a company wants to expand its operations, they may issue corporate bonds. When you buy one of these, you are essentially loaning money to a corporation and they pay you interest on the value of the bonds purchased. These bonds earn a fixed interest rate, usually paid out twice a year. When considering corporate bonds,you should understand the bond’s rating (investment-grade or non-investment grade/junk bonds), maturity (short-, medium- or long-term), interest rate (fixed or floating) and how the coupon (interest payment) is paid (regularly or zero-coupon). To complete your purchase, you’ll need a brokerage account that will cover your purchase price and any commissions your broker might charge on the acquisition. There are two types of corporate bonds: investment-grade and speculative-grade.

Investment-grade Corporate Bonds: These are bonds issued by companies that have a higher credit rating, making them a less risky investment.


Speculative-grade Corporate Bonds: These are issued by companies that are typically newer or in a more competitive sector, making them riskier investments. Since there is a higher chance of default, these bonds make up for the risk by paying out higher interest rates to investors.

Foreign bonds: This is a bond sold by a foreign country or company in their currency. The interest is computed in the currency of the country you bought it from.

Buying Individual Bonds

Buying individual bonds offers investors the ability to lock in a specific yield for a set period of time. This strategy offers stability, whereas the yield on a bond mutual fund or fixed-incomeexchange traded fund (ETF)fluctuates over time.

Keep in mind that when buying bonds directly from the government or a corporation, you will need to contact a broker in order to make a purchase, as these are not traded on the stock exchange like a bond ETF.

Your broker can be a financial institution, brokerage, or another licensed financial advisor. They can provide you a list of bonds available for purchase. After you pick one, they will make the purchase for you.

However, brokers are not free: they usually charge a flat rate commission to purchase bonds. With that in mind, it makes sense to make a purchase that is at least a few thousand dollars to keep your costs to a minimum.

Also, if you decide for some reason to sell the bonds you own before they mature, you will need to call your broker again to make a trade and pay commissions again.

Whether you’re exploring how to buy municipal bonds, corporate bonds or treasuries, the basics of buying an individual bond remain the same: You can purchase them as new issues or on the secondary market.

However, individual bonds offer several challenges. In addition to the wide range of moving parts inherent in each bond, the primary market can be difficult to access for all but the wealthiest investors. The secondary market has less transparent pricing than primary issues, which makes it difficult for investors to know the true cost of individual bonds and how much markup is built into the cost.

If individual bonds seem too complex for your level of investment savvy and you don’t want to use afinancial advisorfor guidance, you can explore two additional ways to add fixed-income instruments to your investments: bond mutual funds and bond ETFs.

Buying Bond Mutual Funds

Bond mutual fundsoffer investors many of the benefits of individual bonds, with decreased risk. Plus, buying mutual funds is a much simpler process.

“Some of the key features of bond mutual funds are the benefit of diversification and professional management,” says Powers. “With a bond mutual fund, investors get the benefit of fixed income professionals managing the money and being in a pooled fund where they’re not holding just ten individual bonds. They’re holding hundreds of bonds where the likelihood of one bond disproportionately impacting your results is much lower.”

Like a stock mutual fund, bond mutual funds let you pool money with other investors to buy shares of a portfolio of bonds. Bond mutual funds may be actively or passively managed, funds typically follow a particular type of bond—corporate or municipal. They tend to pursue a set maturity strategy, long term or short term.

Some of the benefits of bond mutual funds include:

  • Liquidity:You can buy and sell shares of bond mutual funds as easily as buying shares of stock. Unlike stock, orders to buy mutual fund shares are executed once per day, after the market close.
  • Dividend reinvestment:Funds make it easy to reinvest your income payment dividends back into the fund to keep building your investments.
  • Regular income:As an alternative to reinvesting dividends, most bond funds give you the option to receive monthly payouts, providing a steady stream of cash for investors who want the income benefits of bonds.

Bond mutual funds will come with management fees to compensate the fund managers for actively managing the bonds bought and sold within the fund. This fee is expressed as an “expense ratio” and indicates the fees you’ll incur based on your investment each year. For example, a bond fund with an expense ratio of 1% will charge you $10 per year on your $1,000 investment.

Many bond mutual funds have minimum initial investments which you’ll want to note, too.

Buying Bond ETFs

You can invest in bonds by purchasing bondexchange traded funds (ETFs). Like bond mutual funds, ETFs comprise baskets of bonds that follow a particular investment strategy. Bond ETFs may also be passively or actively managed. ETF fees are typically lower than bond mutual fund fees.

(Video) Investing Basics: Bonds

“By and large, ETFs are very low cost, and investors can keep more of the returns for themselves instead of paying a manager’s fees as with a mutual fund,” says Powers. “For a newer investor or someone with less money to invest, the threshold of entry is just the NAV cost of the ETF instead of the initial investment minimums with many mutual funds.”

Besides cost, ETFs offer even greater liquidity. Shares of ETFs trade like stocks during regular market hours, rather than only once a day with mutual funds. Like bond mutual funds, bond ETFs offer regular income payments.

When trying to decide how to buy bonds, a bond mutual fund might be a better solution for investors who plan on holding the fund shares for an extended period of time. More active investors might prefer bond ETFs since there aren’t short-term redemption fees charged by many mutual funds to discourage excessive trading.

Other considerations when it comes to bonds

New issue bonds

Buying new issue bonds means you’re buying bonds on the primary market, or the first time they’re issued, similarly to buying stock in a company’sIPO. Investors acquire new issue bonds at what’s called the offering price.

Secondary Market Bonds

Bondholders often sell their bonds prior to maturity on the secondary market. If you’re interested in learning how to buy bonds that aren’t new issues, you can buy all the above types of bonds on the secondary market. Purchases are made via a brokerage, specialty bond brokers or public exchanges.

When buying bonds on the secondary market, you’ll need to do more research because pricing is less transparent. With new issues, all buyers pay the same price.On the secondary market, there can be a markup on corporate and municipal bonds. It’s also entirely possible to see the same bond offered by two different dealers at two different prices. You may also be charged commissions, transaction fees and contract fees on your bond-related transactions.

Bond Ladders

When buying individual bonds, some investors want to manage their interest rate risk by spreading out the maturity dates for the bonds they hold. This is referred to as “bond laddering.” Fixed-income investors use bond ladders to provide additional flexibility adjust their holdings to changing market conditions.

For example, you might have $15,000 to invest in bonds. You could spend it all on a single bond with a 10-year maturity date, but your capital would be tied up for a decade—plenty can change in markets in ten years. With a simple bond ladder, you would purchase three $5,000 bonds with staggered maturity dates: One year, two years and three years, for instance.

As each bond comes to maturity, you reinvest the principal in bonds with the longest term you chose at the outset—a 3-year maturity in this case. With this simple bond ladder, you would have $5,000 to reinvest each year. If interest rates are higher, you gain the advantage of better yields. If they’re lower, the ladder still includes maturities locked in at higher yields.Plus, you can stagger coupon payments to improve cash flow.

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(Video) Individual Bonds vs. Bond Funds: What’s the Difference?

The Bottom Line

Buying bonds, whether individual bonds, bond mutual funds, or bond ETFs, provides diversification and reliable income for your investment portfolio. With all bond-related investments, you must do your due diligence: Research issuers, comparebond ratings, and if possible, consult with your investment professional to help guide your choices.


How can an investor buy a bond? ›

Unlike stocks, bonds aren't publicly traded on an exchange. Instead, bonds are traded over the counter, meaning that you must buy them from brokers. However, you can buy U.S. Treasury bonds directly from the government.

How do you buy bonds in the primary market? ›

You can buy corporate bonds on the primary market through a brokerage firm, bank, bond trader, or a broker. Some corporate bonds are traded on the over-the-counter market and offer good liquidity.

How do you choose a bond for a portfolio? ›

3 questions to help you choose a bond fund
  1. How long do you intend to keep the money invested? ...
  2. Are you investing for current income or for long-term growth? ...
  3. How comfortable are you with risk?

How often can I buy $10000 bonds? ›

In a calendar year, one Social Security Number or one Employer Identification Number may buy: up to $10,000 in electronic I bonds, and. up to $5,000 in paper I bonds (with your tax refund)

Is TreasuryDirect the only way to buy I bonds? ›

The Treasury Department, the federal body that issues I bonds, offers two purchase methods. The main way is to go online using, and the I bonds bought through this website are digital. There's also an entirely separate way to purchase paper I bonds.

What are the 5 types of bonds? ›

There are five main types of bonds: Treasury, savings, agency, municipal, and corporate. Each type of bond has its own sellers, purposes, buyers, and levels of risk vs. return. If you want to take advantage of bonds, you can also buy securities that are based on bonds, such as bond mutual funds.

What happens when an investor buys a bond? ›

A bond is a debt obligation, like an Iou. Investors who buy corporate bonds are lending money to the company issuing the bond. In return, the company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond comes due, or matures.

Which type of bond is the safest? ›

U.S. Treasury bonds are considered the safest in the world and are generally called “risk-free.” The 10-year rate is considered a benchmark and is used to determine other interest rates such as mortgage rates, auto loans, student loans, and credit cards.

How much money do you need to start buying bonds? ›

You can buy an electronic savings bond for any amount from $25 to $10,000 to the penny.

Can I buy bonds directly? ›

Many brokers now give access to investors to purchase individual bonds online, although it may be easier to purchase a mutual fund or ETF that specializes in bonds. Government bonds can be purchased directly through government-sponsored websites without the need for a broker.

Who usually buys bonds? ›

Underwriters are investment banks and other firms that help issuers sell bonds. Bond purchasers are the corporations, governments, and individuals buying the debt that is being issued.

What are three 3 important factors an investor should consider before buying bonds? ›

Like individual bonds and other investments, bond fund investments entail risk. There are many factors that investors need to consider including the total costs, credit quality, manager quality, risks and the ability to exit these funds before making investment decisions.

When should I start adding bonds to my portfolio? ›

Instead of a conservative approach, the best practice for investors in their 20s, 30s and 40s is to allocate 10% of their money to bond holdings, rising to 20% for people in their 50s and 30% in their 60s, he says.

What should I check before investing in bonds? ›

Things to consider before investing in bonds
  1. Check whether the bond is secured or unsecured. ...
  2. Check for secondary market liquidity. ...
  3. Check out if the coupon rate or the rate of interest is competitive. ...
  4. What is the credit rating of the bond. ...
  5. Does the bond have a callability clause.
Dec 22, 2022

Is there a downside to I bonds? ›

That said, I bonds do have some disadvantages, such as the fact that the bonds cannot be redeemed for one year after purchase and their early redemption penalties. If you redeem your I bond within five years of purchasing it, you'll lose the last three months of interest the bond earns.

Do you pay taxes on I bonds? ›

Interest from your bonds goes on your federal income tax return on the same line with other interest income.

How much is a 1000 bond worth in 10 years? ›

For example, a $1000 bond might be traded on the open market at a cost of $600, to be paid in full after 10 years. Quite often, standard issue bonds will be stripped of their coupons and sold on the public market as zero coupon bonds.

Can I buy Treasury I Bonds at my bank? ›

Individuals, organizations, fiduciaries, and corporate investors may buy Treasury securities through a bank, broker, or dealer.

Is buying Treasury I Bonds a good idea? ›

Are I bonds a good investment for you? I bonds can make good short-term investments, but you should feel comfortable holding them for at least one year and ideally, five years before cashing them in. They can be a good fit for seniors who want to earn interest on their savings while also keeping their nest egg safe.

Is TreasuryDirect gov legit? ›

About — TreasuryDirect. A .gov website belongs to an official government organization in the United States. A lock () or https:// means you've safely connected to the .gov website. Share sensitive information only on official, secure websites.

Which bond gives highest return? ›

Performance of the Best Bonds to Invest in India
  • 1) Tata Income Fund Direct-Growth.
  • 2) ICICI Prudential Long-Term Bond Fund Direct-Plan-Growth.
  • 3) Nippon India Income Fund (Growth)
  • 4) UTI Bond Fund Direct-Growth.
  • 5) LIC MF Bond Fund Growth.
Jan 11, 2023

Which bond has highest interest rate? ›

High-yield bonds, or junk bonds, are corporate debt securities that pay higher interest rates than investment-grade bonds. High-yield bonds tend to have lower credit ratings of below BBB- from Standard & Poor's and Fitch, or below Baa3 from Moody's.

When should you buy bonds? ›

If your objective is to increase total return and "you have some flexibility in either how much you invest or when you can invest, it's better to buy bonds when interest rates are high and peaking." But for long-term bond fund investors, "rising interest rates can actually be a tailwind," Barrickman says.

What risks do investors face when buying a bond? ›

Benefits and risks of bonds

All bonds carry some degree of "credit risk," or the risk that the bond issuer may default on one or more payments before the bond reaches maturity. In the event of a default, you may lose some or all of the income you were entitled to, and even some or all of principal amount invested.

Why would investor buy a bond instead of a stock? ›

They provide a predictable income stream. Typically, bonds pay interest twice a year. If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing. Bonds can help offset exposure to more volatile stock holdings.

Why are investors moving away from bonds? ›

The short answer is higher interest rates. Because inflation remains well beyond central bank targets, central banks have aimed to slow the economy through raising interest rates, which in turn, pulled down bond values. This situation is sort of a double-edged sword for investors.

What bond has lowest risk? ›

The lowest-risk investment depends on how you define risk. If risk is the chance of your investment losing value, then U.S. Treasury bonds are the lowest-risk option since it is highly unlikely the U.S. government will default on its debt.

Which bond has least risk? ›

Some of the safest bonds include savings bonds, Treasury bills, banking instruments, and U.S. Treasury notes. Other safe bonds include stable value funds, money market funds, short-term bond funds, and other high-rated bonds.

What bonds to invest in 2023? ›

  • The Best Bond ETFs of March 2023.
  • iShares Inflation Hedged Corporate Bond ETF (LQDI)
  • Vanguard Total International Bond ETF (BNDX)
  • iShares Interest Rate Hedged High-Yield Bond ETF (HYGH)
  • iShares 0-5 Year TIPS Bond ETF (STIP)
  • SPDR Nuveen Bloomberg Short-Term Municipal Bond ETF (SHM)
5 days ago

Can I buy $10000 worth of I bonds every year? ›

A given Social Security Number or Employer Identification Number can buy up to these amounts in savings bonds each calendar year: $10,000 in electronic EE bonds. $10,000 in electronic I bonds. $5,000 in paper I bonds that you can buy when you file federal tax forms.

How long does it take for a $100 bond to mature? ›

SERIES I BONDS ISSUED SEPTEMBER 1998 AND THEREAFTER All Series I bonds reach final maturity 30 years from issue. Series I savings bonds earn interest through application of a composite rate.

Can I lose money investing in bonds? ›

Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.

Can I buy bonds through Fidelity? ›

Fidelity offers a wide range of bonds, CDs, and bond funds. Plus, we have the tools and expertise to help you build a strong strategy.

How to buy 2 year bonds? ›

You can buy short-term Treasury bills on TreasuryDirect, the U.S. government's portal for buying U.S. Treasuries. Short-term Treasury bills can also be bought and sold through a bank or broker. If you do not hold your Treasuries until maturity, the only way to sell them is through a bank or broker.

Where does the money go when you buy a bond? ›

They are debt obligations, meaning that the investor loans a sum of money (the principal) to a company or a government for a set period of time, and in return receives a series of interest payments (the yield). When the bond reaches its maturity, the principal is returned to the investor.

Do billionaires buy bonds? ›

The world's richest people often invest in corporate bonds, because bonds behave differently than stocks. Bonds are essentially loans taken out by corporations to raise needed funds, and bondholders benefit from the interest paid on these loans.

How do you buy the best bonds? ›

All you need to do is have a demat account and a trading account with a brokerage house. Once you have them, you can buy and sell bonds as per your choice. Once you do so, an amount is credited into your account which you need to input to complete bank verification. Post it, you need to fill in the nominee information.

What are the three C's of investing? ›

Lynch gave Rose his "Three C's" of investing — complacency, concern, and capitulation. "Being complacent is the worst one," Lynch says. "If you're working hard, you can avoid it." When considering an investment, Lynch says, you have to ask yourself if it is still early for a company or if it has years of growth ahead.

What are better investing four basic rules for investors? ›

It starts with these core principles:
  • Invest a set amount of money regularly. Do so regardless of the swings in the market. ...
  • Reinvest all earnings. ...
  • Buy stock in high-quality growth companies. ...
  • Diversify your portfolio.

What are the 2 most basic investment considerations? ›

Risk and return

Return and risk always go together. The higher the potential return, the higher the risk. You should never blindly pursue high-return investments. Bear in mind your investment goal, investment period and risk tolerance.

Where can I buy new treasury bonds? › is the one and only place to electronically buy and redeem U.S. Savings Bonds.

Can I bonds be bought at any time? ›

You can buy I bonds in electronic form, at face value, after you open a TreasuryDirect® account. Purchase prices start at $25, and you can buy in any amount above that up to $10,000 per person, per calendar year. You also can buy an I bond in paper form, through the Tax Time Purchase Program.

How do I buy a 90 day treasury bond? ›

You can buy short-term Treasury bills on TreasuryDirect, the U.S. government's portal for buying U.S. Treasuries. Short-term Treasury bills can also be bought and sold through a bank or broker. If you do not hold your Treasuries until maturity, the only way to sell them is through a bank or broker.

Can I buy bonds anytime? ›

(No paper security is issued.) Open a TreasuryDirect account online and then buy anytime, 24 hours a day, from your computer. For convenience, you can schedule recurring debits from your personal bank account.


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