3.7 Other Fixed-Income Securities & Reading Bond Quotes

Beyond plain government and corporate bonds, Canadian investors use several other fixed-income products. Each has distinct features, risks and protections that exam questions test.

Guaranteed Investment Certificates (GICs)

A GIC is a deposit with a bank, trust company or credit union that pays a set rate (or a rate linked to an index) for a fixed term, usually 30 days to 5 years.

• Non-redeemable GICs lock the money in until maturity and usually pay more; redeemable (cashable) GICs can be cashed early but pay less.
• GICs issued by CDIC members are insured up to $100,000 per insured category, including principal and interest. Provincially regulated credit unions are covered by provincial deposit insurers.
• Interest is fully taxable each year, even on compound GICs that pay interest only at maturity.

Canada Savings Bonds: A Discontinued Product

For decades, Canada Savings Bonds and Canada Premium Bonds were sold to retail investors through payroll plans and banks. The federal government stopped selling them in 2017, and the remaining bonds have since matured. You may still see them in older material.

Mortgage-Backed Securities and Canada Mortgage Bonds

NHA mortgage-backed securities (NHA MBS) are created by pooling residential mortgages insured under the National Housing Act. Investors receive a share of the pool's cash flows, and the Canada Mortgage and Housing Corporation (CMHC) guarantees timely payment, giving them Government of Canada credit quality.

Because MBS investors receive principal back early when borrowers refinance at lower rates, they must reinvest at those lower rates. That prepayment risk is why MBS yields exceed those of comparable government bonds.

Convertible Bonds and Debentures

A convertible bond or debenture can be exchanged for a set number of the issuer's common shares. It offers fixed income plus a share in the upside, so it usually carries a lower coupon than a straight bond.

• Conversion price: the price per share at which conversion occurs.
• Conversion ratio: par value ÷ conversion price = number of shares per bond.
• Conversion value (parity): conversion ratio × current share price.
• Conversion premium: the amount by which the bond's market price exceeds its conversion value.

Worked Example: Convertible Debenture

A $1,000 debenture is convertible at $25 per share, so it converts into $1,000 / 25 = 40$ shares. The shares trade at $28.

• Conversion value: $40 \times 28 = 1{,}120$ dollars.
• If the debenture trades at $1,150, the conversion premium is $(1{,}150 - 1{,}120) / 1{,}120 = 2.68\%$.

When the shares rise well above the conversion price, the debenture trades close to its conversion value. When the shares fall, its price is supported by its value as a straight bond. Issuers can often force conversion by calling the debenture when its conversion value is above the call price.

High-Yield and Zero-Coupon Issues

High-yield (speculative-grade) bonds are rated below BBB (low) / BBB−. They pay higher yields because their default risk is higher, and their prices often behave more like stocks in a downturn. Zero-coupon bonds pay no interest and are sold at a deep discount; strip bonds (covered earlier) are the main Canadian example.

How to Read a Bond Quote

Dealers quote bonds as a price per $100 of face value with the corresponding yield to maturity:

• The bid (98.75) is what the dealer will pay you; the ask (98.90) is what you pay the dealer. The gap is the dealer's spread.
• A price below 100 means a discount, so the yield is higher than the coupon.
• To find the dollar cost, multiply by face value: buying $10,000 face at 98.90 costs $9,890, plus accrued interest.
• Corporate bonds are often quoted by their spread over a Government of Canada benchmark, for example "+125" (1.25 percentage points).

Worked Example: Buying and Selling at the Quoted Prices

A client buys $50,000 face value of the Ontario 3.65% bonds at the ask price of 98.90:

• Price paid: $50{,}000 \times 98.90 / 100 = 49{,}450$ dollars, plus accrued interest.

If the client sold the same bonds back immediately at the bid of 98.75:

• Proceeds: $50{,}000 \times 98.75 / 100 = 49{,}375$ dollars, plus accrued interest.

The $75 difference is the dealer's spread, the cost of an immediate round trip (0.15 per $100 of face value). Spreads are narrower for large trades in liquid government bonds and wider for small trades in less liquid corporate or municipal issues.

Price and Yield Move in Opposite Directions

Because the coupon is fixed, a bond's price must fall for its yield to rise. If yields on similar Ontario bonds rose to 4.0%, the 3.65% bond's price would fall further below 100; if they fell to 3.5%, it would trade above 100 at a premium. That inverse relationship, and how strongly it affects bonds with different maturities and coupons, is covered in the next chapter.