Types of Investments

There are several ways to invest your money. To determine which investment vehicle is right for you, you need to understand the characteristics of each type.

A fixed income security is like a loan. It’s an investment that provides a return in the form of fixed periodic payments and eventual return of principal at maturity. The day the fixed income investment is to be paid back to you is called the maturity date. Fixed income investments that mature within a year are often referred to as money market instruments. The issuers of these investments are scored by various rating agencies for the riskiness of their issue and their ability to pay back their loan. Trades typically settle in one business day but settlement can be required for the same day depending on the issuer.

There are several different types of fixed income securities:

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Types of fixed income securities

The Canadian government issues Canada bonds to raise money. A bond is a promise to pay a specified amount of interest at intervals over a given period of time and then to repay the principal on the bond's maturity date. The principal is called the face value and is stated on the bond. Canada bonds are considered the safest long-term investment in Canada.

Main Features:

  • Safe and secure
  • Terms to maturity range from a few months to 30 years
  • Most liquid, or readily traded, terms are two, three, five, ten and 30 years
  • Same day settlement

Alternatives:

  • Government of Canada agency bonds, like those from Canada Mortgage and Housing Corp., Farm Credit Corp. and Export Development Corp.
  • Provincial government bonds
  • Provincial agency bonds
  • Corporate bonds and debentures
  • Stripped coupons
  • Guaranteed investment certificates

Provincial governments issue bonds to raise money. Interest rates and risk levels vary from province to province.

Main Features:

  • One of the safer Canadian investments
  • Higher yield than Canada bonds
  • Terms to maturity range from a few months to 30 years
  • Most liquid, or readily traded, terms are two, three, five, ten and 30 years
  • Three day settlement

Alternatives:

  • Canada bonds
  • Government of Canada agency bonds, such as those from Canada Mortgage and Housing Corp., Farm Credit Corp. and Export Development Corp.
  • Provincial agency bonds
  • Corporate bonds and debentures
  • Stripped coupons
  • Guaranteed investment certificates

These are bonds issued by federal government agencies to raise money. Agencies include Canada Mortgage and Housing Corp., Farm Credit Corp., Export Development Corp., Business Development Bank, and the Canadian Wheat Board. Provincial government agencies also issue bonds. Interest rates and risk levels vary from province to province.

Two types of federal agency bonds are available:

  • Full Bond Issues: These are much like any Canada or provincial bond issue. Generally, an agency bond issue ranges from $100 million to $250 million.
  • Medium-Term Notes: These are smaller bond issues as the agency bond issue ranges from $10 million to $50 million.

Main Features:

  • One of the safest long-term Canadian investments
  • Higher yield than Canada bonds, but less liquid
  • Terms to maturity range from a few months to 30 years
  • New issues with five- and ten-year terms are the most liquid
  • Settlement varies from same day to three days depending on the issuer

Alternatives:

  • Canada bonds
  • Provincial government bonds
  • Corporate bonds and debentures
  • Stripped coupons
  • Guaranteed investment certificates

A guaranteed investment certificate is an investment that offers a guaranteed rate of return over a fixed period of time. It is most commonly issued by trust companies or banks. Because of its guaranteed rate, the return is generally less than other fixed income investments, such as corporate bonds.

Main Features:

  • Redeemable only at maturity
  • Interest rate determined by frequency of interest payment
  • Interest paid monthly, quarterly, semi-annually, annually or at maturity
  • Terms to maturity range from 30 days to five years
  • Insured up to $100,000 when issued by a CDIC member
  • Same day settlement

Alternatives:

  • Canada bonds
  • Provincial government bonds
  • Stripped coupons
  • Treasury bills

Corporations issue bonds and debentures to raise money. These are debt securities, which means the investor is lending money to a corporation. The bond is the company's agreement to pay a specified rate of interest to the investor at intervals over a given period of time and to then repay the principal on the bond's maturity date. Bonds are secured with collateral, such as mortgages or future revenues.

Debentures are similar to bonds, but are not backed by collateral. Instead, their security depends on the corporation’s creditworthiness — its ability to make the interest payments and repay the principal at maturity.

Main Features:

  • Higher yields than government bonds, but riskier and less liquid
  • Yields vary widely based on the issuing company's credit quality, real and perceived risks, political factors, liquidity and specific features of the issue
  • Terms to maturity range from a few months to 35 years
  • Safety can be judged by the collateral, which in the case of a debenture is none
  • In the event of bankruptcy, bonds and debentures rank ahead of stock for repayment, but an investor still may receive only pennies on the dollar
  • Three day settlement

Alternatives:

  • Canada bonds
  • Federal agency bonds
  • Provincial government bonds
  • Provincial agency bonds
  • Stripped coupons

Companies issue high-yield bonds to raise money in the same way they issue regular bonds. High-yield bonds were known as junk bonds in the 1980s.

When investors buy bonds, they lend money to a corporation. The bond is the company's agreement to pay a specified rate of interest to the investor at intervals over a fixed period and to then repay the principal on the bond’s maturity date. Bonds are secured with collateral, such as mortgages or future revenues.

Main Features:

  • Higher yields and significantly higher risk than corporate or government bonds
  • Yields vary based on the company's credit quality, real and perceived risk, political factors, liquidity, and specific features of the issue
  • Relative safety can be judged by the collateral
  • In the event of bankruptcy, high-yield bonds rank ahead of stock for repayment, but an investor may still receive only pennies on the dollars
  • Three day settlement

Alternatives:

  • Canada bonds
  • Federal agency bonds
  • Provincial government bonds
  • Provincial agency bonds
  • Stripped coupons

Stripped coupons are interest payments coupons detached from government bonds. Residuals are the government bonds without their interest coupons. Both are sold as individual investments known as "strips." Strips are always sold at a discount and mature at face value. The longer the term to maturity, the deeper the discount. The difference between the purchase price and the face value is the interest income.

As with all bonds, you know exactly how much the investment is worth at maturity and how much income will be paid. But with strips, you get the benefit of compounding yield, so a relatively small initial investment goes a long way. Strips are particularly effective when purchased with staggered maturity dates, enabling you to create an income stream that meets your needs.

For tax reasons, it's best to invest in strips through a registered account, such as an RRSP, RRIF or RESP.

Main Features:

  • Higher yields than ordinary bonds with similar terms and credit quality
  • Government guaranteed regardless of the size of the investment
  • Highly liquid, can be sold prior to maturity at market value
  • Market value varies with changes in interest rates and is much more volatile than ordinary bonds with similar terms and credit quality
  • Earnings distributed at maturity
  • Terms vary from 18 months to 30 years
  • Settlement varies from same day to three days depending on the issuer

Alternatives:

  • Canada bonds
  • Provincial bonds
  • Agency bonds
  • Corporate bonds
  • High-yield bonds
  • Commercial paper
  • Canada treasury bills
  • Provincial treasury bills

Bankers' acceptance (BA) is a short-term money market instrument guaranteed by banks. They are one of the safest Canadian investments. You won't get rich putting your money in BA, but they can be a good place to park your money while you're deciding what other investments to buy.

Main Features:

  • Safe and secure
  • Liquid, so they're readily traded
  • 30, 60, and 90 day terms; terms from one to 365 days are available but may be less liquid
  • Same day settlement

Alternatives:

  • Treasury bills
  • Commercial paper from companies like GMAC and Ford
  • Short-term stripped coupons

Commercial paper is an unsecured, short-term investment issued by a corporation, typically to raise money for financing accounts receivable and inventory. It's actually a short-term loan backed by the company's credit rating. The stronger the company, the less risky the investment. A commercial paper is usually used to park money temporarily before putting it into a higher yielding investment.

Main Features:

  • Slightly higher risk than treasury bills and bankers' acceptances, unless the commercial paper is asset-backed
  • Terms range from one to 365 days
  • 30, 90, 182, and 365 day terms are the most liquid, or readily traded. Other terms, known as "off-the-run" issues, may have a slightly better yield but may be less liquid
  • The difference between the purchase price and the maturity value represents the return on investment
  • Same day settlement

Alternatives:

  • Canada treasury bills
  • Bankers' acceptances
  • Provincial treasury bills
  • Short-term stripped coupons

Canada treasury bills are short-term debt instruments issued by the federal government in large denominations and sold at a discount.

Main Features:

  • Safe and secure
  • Terms range from one to 365 days
  • 30, 90, 182, and 365 day terms are the most liquid, or readily traded. Other terms, known as "off-the-run" issues, may have a slightly better yield but may be less liquid
  • The difference between the issue price of the treasury bill and its par value (i.e., the principal amount stated on the face of the bill and redeemable at maturity) represents the investor's return in lieu of interest
  • Same day settlement

Alternatives:

  • Provincial treasury bills
  • Bankers' acceptances
  • Commercial paper
  • Short-term stripped coupons

Provincial treasury bills are short-term debt instruments issued by provincial governments in large denominations and sold at a discount.

Main Features:

  • Safe and secure
  • Not as readily traded as Canada treasury bills
  • Slightly higher yield than Canada treasury bills
  • Terms range from one to 365 days
  • The difference between the issue price of the treasury bill and its par value (i.e., the principal amount stated on the face of the bill and redeemable at maturity) represents the investor's return in lieu of interest
  • Same day settlement

Alternatives:

  • Canada treasury bills
  • Bankers' acceptances
  • Commercial paper
  • Short-term stripped coupons

Commercial mortgage-backed securities (CMBS) are investments secured by mortgages on commercial property. The investment represents ownership of an interest in a group of commercial mortgages held by the CMBS issuer in trust. Principal and interest from the underlying mortgages are used to pay monthly principal and interest on the CMBS. Commercial properties that may be mortgaged include shopping centres, hospitality, industrial, mobile-home parks, multi-family buildings, offices, and retirement homes.

Main Features:

  • Terms are typically three, five or ten years
  • Attractive rates of return
  • RRSP eligible
  • Risk and return vary depending on the health of the real-estate market
  • Same day settlement

Alternatives:

  • Corporate bonds
  • Asset-backed securities

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