While the long term bull market in bonds was on, investors could switch to the bond market when the stock market was not doing well and make money. Then the bonds were moving differently that the stock market.
We have been in a bond bull market for so long few people remember a bond bear market. Most people talk about a 30 year bull market and that is longer than most current investors have been investing. The problem I see is that the switch from stock to bond and back again will not work in the bond bear market.
Also I have no idea why people would buy ETFs of bonds or Mutual Funds with bonds. Since bond values and interest rates move in opposite directions you will lose capital when interest rates rise. Of course this is only permanent if you buy and sell in the open market, which ETS and Mutual Funds do. If you buy bonds yourself, and this is very easy, you will get back your capital if you hold the bond until maturity.
Bonds are very easy to buy. When I bought them I would phone the TD brokerage line and ask what they have in bonds. I think you can even buy them online via TD website now.
Bonds are issued with a set interest rate at $100 per unit. For example, a $5,000 bond would be issued at $100 for 500 units or for $5,000.00. That is 100 times 500 is $5,000.00. Interest rates are always changing so after issue a bond is priced either over or under $100.00. Remember that interest rates and bond values go in the opposite direction. If a hold a bond to maturity, you will get back your money plus interest promised when you bought the bond.
If a bond is selling at a price over $100 that means that it is selling for an interest rate lower than the one the bond was issued with. During the life of the bond you will be getting the interest rate that the bond was issued with and $100 per unit at maturity. Because you are getting more interest than the rate when you bought the bond, part of the interest payments will cover the extra you paid for the bond as you will only get $100 per unit at maturity. You will be taxed on interest received and also have a capital loss on the difference between what you paid per unit for the bond and $100.00 per unit.
If a bond is selling at a price under $100 per unit it means that the bond is selling for an interest rate higher than the bond was issued with. During the life of the bond you will get the interest the bond was issued with plus $100.00 per unit at the maturity of the bond. Part of your interest will be covered in the extra money you get at Maturity. You will be taxed on the interest received and you will have a capital gain for the difference between what you paid for the bond and what you received at maturity.
See my old post on Buying Bonds... learn more . The only thing that is changed is that you can now buy bonds online through some brokerages. So to repeat the good thing about actually buying your bonds is that if you hold them to maturity you will get your capital back.
On my other blog I wrote yesterday about TransCanada Corp (TSX-TRP, NYSE-TRP)... learn more. Next, I will write about AltaGas Ltd (TSX-ALA, OTC-ATGFF)... learn more on Friday, March 23, 2018 around 5 pm.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
See my site for an index to these blog entries and for stocks followed. I have three blogs. The first talks only about specific stocks and is called Investment Talk. The second one contains information on mostly investing and is called Investing Economics Mostly. My last blog is for my book reviews and it is called Non-Fiction Mostly. Follow me on Twitter. I am on Instagram. Or you can just Google #walktoronto spbrunner8166 to see my pictures.