Bonds (definition)

A bond is a loan you make to a government or company. In return, the issuer pays you interest at fixed intervals, then repays the principal at maturity. Bonds are the counterweight to stocks in a portfolio.

Their role in a portfolio

Bonds provide stability and income. When stocks fall, quality bonds often cushion the blow. That's why the bond share usually rises as retirement approaches (see asset allocation).

Interest-rate risk

A bond's price falls when interest rates rise (and vice versa). Longer-maturity bonds are more sensitive. Most investors hold a diversified bond ETF rather than individual bonds.

Taxation

Bond interest is fully taxed as income — often best held in a TFSA or RRSP.

Frequently asked questions

Why hold bonds?

For stability and income. They reduce portfolio volatility and often cushion stock declines.

Can bonds lose value?

Yes. When rates rise, existing bond prices fall. That's interest-rate risk.

Individual bonds or a bond ETF?

A diversified bond ETF is simpler and more liquid for most investors.

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