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Understanding Fixed Income: How to Invest in Fixed Income Products?

<< Benefits & Risks of Fixed Income Products 

There are several ways to invest in fixed income products. The most easiest are the following:

Savings Account: A liquid investment which still provides a stead stream of income through interest rates.  For example, if you invest $1,000 in a savings account paying 3.15% interest, you can remove your money whenever you want, but at the same time, will still get the interest guaranteed on the amount which is in the account.

Guaranteed Investment Certificate (GIC):  One of the safest ways to invest your money.  When you invest in a GIC, you are lending your money to the Bank or other financial institution.  In return, the Bank or financial institution guarantees your loan and pay you an interest rate.  The longer you hold the GIC for the better the interest rate you get.

If you redeem (remove money from the investment) before the maturity date, you may be charged a penalty if the GIC is not redeemable.  

These investments are insured by the government as long as they are under $250,000, held in Canadian dollars and for a period less than 5 years. 


Government of Canada Bonds: These are the safest investments in Canada.  They are fully guaranteed by the government and if held to maturity will pay a fixed amount along with principal.  You can also sell them at market value at any time.  The Canadian Government issues bonds in Canadian dollars and US dollar denominations. 


Treasury Bills:  Treasury Bills are government backed fixed income investments which are guaranteed by the government.  They are sold by both the Canadian and the US government.  They are called “risk free rate of return”.  The key differences between a Government of Canada Bond and a Treasury Bill is that the latter can only be issued for 1 year and pays income by selling the bonds at a discount.  This means, you buy a bond for $1000 by paying $600 now and collecting $400 at a pre-determined later point.  This way the holder is guaranteed to get the difference between what he paid and maturity amount at a later point.

Bonds: Like all Fixed Income products, Bonds are an IOU.  Those who buy the binds are loaning the money to the issuer of the bond and have trust that they will pay them back. 

You can buy fixed income products through any bank and most financial institutions. 

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