Bonds are an important part of a diversified investment portfolio because they help to offset the volatility of equities. In addition, the regular interest payments that bonds generate can be an ideal way to produce a steady source of income. This support centre will help you understand what bonds are, how they work and why you should recommend them as a part of your clients’ investment plan.
Overview of bonds
A bond is simply a promise to repay money, with interest, on a certain date in the future. While stocks represent ownership shares in a corporation, a bond is a contract that obliges the borrower to pay the lender a specified sum of money at regular intervals (interest) and to repay the amount of the loan (the principal) at the maturity date. The holder of a bond doesn’t have the ownership privileges that a stockholder does.
Putting bonds in context
You can think of bonds as a loan, with the investor putting up the money. As shown below, when you invest in a bond, you lend money to an “issuer,” such as a corporation or government (federal, provincial or municipal), which needs the money to fund business growth or meet immediate spending needs.
In return, you receive regular income payments in the form of interest. The amount of interest paid is normally fixed when the bond is issued, which is why bonds are called “fixed interest” or “fixed-income” investments.
Bonds are issued for a defined period, and when that period expires —when the bond reaches “maturity” — the issuer promises to repay the principal, or face value, of the bond.
A variety of institutions can issue bonds, including the Government of Canada, Canadian government agencies, provinces, municipalities and corporations.
Federal government
The Canadian federal government is the largest single issuer in the Canadian bond market. Government of Canada bonds and securities issued in its own name or by federal crown corporations–including Canada Mortgage and Housing Corporation, Farm Credit Canada and Export Development Canada–offer the lowest risk of default. These bonds are backed by the full faith and credit of the Canadian government.
Provincial government
Bonds are typically issued by provincial and municipal governments. They are usually issued to finance public improvement projects or fund ongoing spending. The credit ratings of provincial bonds and those issued by municipal governments can vary widely. However, provincial bonds have historically experienced very low default rates.
Corporations
Corporate bonds represent loans by investors to corporations. Companies issue bonds to finance operations as an alternative to issuing shares of stock. Most major corporations issue some type of bonds. Canadian corporations regularly raise funds outside of Canada–largely in the United States where they may issue bonds in U.S. currency and pay interest in U.S. dollars. Corporate bonds can be very safe when issued by strong, reputable companies–or they can be very risky when issued by financially unstable companies.
Bonds can be grouped into three categories according to their term to maturity.
- Short-term bonds. From one up to 5 years remaining to maturity.
- Medium-term bonds. From 5 to 10 years remaining to maturity.
- Long-term bonds. Greater than 10 years remaining to maturity.
In Canada, DBRS, Moody’s Canada Inc. and Standard & Poor’s Ratings Services provide independent rating services for many debt securities. A bond’s credit rating reflects an independent rating agency’s opinion of the issuer’s ability to pay interest on the bond and ultimately to repay the principal at maturity. Bond ratings are important because they suggest how much an issuer must pay to borrow money and compensate investors for assuming credit risk. The chance that a bond issuer will fail to pay interest and principal in a timely manner, or negative perceptions of the issuer’s ability to make such payments, will cause the price of a bond to decline. If payments aren’t made in full and on time, the issuer has “defaulted” on the bond.
The lower a bond’s credit rating, the higher the interest rate the borrower must pay to entice investors to purchase the bond.1
Investment-grade bonds
DBRS |
S&P |
Moody’s |
Ratings |
|---|---|---|---|
AAA |
AAA |
Aaa |
Highest quality with lowest risk; issuers are exceptionally stable and dependable. |
AA |
AA |
Aa |
High quality, slightly higher degree of long-term risk. |
A |
A |
A |
High-medium quality, many strong attributes but vulnerable to changing economic conditions. |
BBB |
BBB |
Baa |
Medium quality, adequate but less reliable over the long term. |
Below investment-grade bonds
DBRS |
S&P |
Moody’s |
Ratings |
|---|---|---|---|
BB |
BB |
Ba |
Speculative, moderate security but not well safeguarded. |
- |
B |
B |
Low quality, future default risk. |
- |
CCC |
Caa |
Poor quality, clear danger of default. |
B |
CC |
Ca |
Highly speculative, often in default. |
CCC/CC/C |
C |
C |
Lowest rating, poor prospects of repayment. |
D |
D |
- |
In default. |
You may suggest including bonds in your clients’ portfolios to help offset some of the volatility of equities, since bond and equity prices rarely move together. But even when they do, movements in bond prices tend to be less extreme than the stock market. And the regular payments that bonds generate can be reassuring when equity prices fall.
Why Vanguard?
Everything we do at Vanguard is designed to give our clients the best chance for investment success.
From our ownership structure of The Vanguard Group aligning with the interests of our clients, our history of long-term performance consistency, to our enduring efforts of lowering the costs of investing. Vanguard puts investors first around the world.
Vanguard may be best known globally for equity indexing however our expertise is heavily routed in bond index investing as well.
Vanguard is a pioneer in bond index investing, having introduced the first no-load bond index mutual fund in 1986. Over the years, we have developed a rigorous process to screen, evaluate, and select benchmarks for our index ETFs.
Fixed income products are a valuable part of any portfolio’ asset allocation, but how do Vanguard Fixed Income Index ETFs ensure the best possible performance?
One of the largest bond fund providers in the world. Vanguard Fixed Income Group manages more than $2 trillion USD in assets across the bond spectrum.
Low costs can enhance tracking precision, eliminating the need to reach for yield by taking on more credit quality or duration risk.
Our large scale and established presence in the market can lead to trading leverage.
We've built strong relationships with trading counter-parties and issuers.
These relationships give us unique market insights that help us improve portfolio strategy and trading efficiency.
Our large scale also helps to lower expense ratios by spreading costs across a large asset base.
Technology helps us manage the ETF ecosystem
The simplicity of ETFs belies the amount of activity and number of partners required to ensure investors can transact in Vanguard ETFs at any time during the trading day. Through its various systems, Vanguard’s Global ETF Management system (GEM) provides benefits to those who interact with it as well as those investors who don’t.
Since Vanguard launched GEM in 2016, fixed income spreads have seen a consistent and steady reduction. Our GEM technology ties together our front, middle and back offices and is key to making our ETF infrastructure run successfully.
Vanguard Fixed Income Group
Vanguard Fixed Income Group (FIG) is among the world’s largest bond fund managers, overseeing a broad range of index and active strategies. With Vanguard’s scale, FIG is a market leader across the globe. Made up of sophisticated portfolio management and specialized trading teams in 3 different regions, FIG offers investors the benefits of local market expertise and efficient trade execution across time zones.
A pioneer of the world’s first bond index fund in 1986, we have refined techniques in total-return management, credit research, index sampling, and risk management–all in an effort to create attractive opportunities while helping to protect investors during periods of uncertainty.
193 Crew members
110 Portfolios
$1.7 T Assets under management $1.3 T indexed
Source: Vanguard. Assets in USD, as of December 31, 2023.
Our experts
Greg Davis, CFA
Chief investment officer
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Gregory Davis, CFA, is Vanguard’s chief investment officer. In this role, he oversees the assets managed by Vanguard Fixed Income, Equity Index, and Quantitative Equity Groups. The funds managed by these groups include active and index stock and bond funds, money market funds, and stable value funds. Previously, he was principal and global head of Vanguard Fixed Income Group, responsible for its portfolio management, strategy, credit research, trading, and planning functions. He has also served as the company’s Asia-Pacific chief investment officer and a director of Vanguard Investments Australia. He is a member of the Treasury Borrowing Advisory Committee of the U.S. Department of the Treasury.
Greg has more than 22 years of investment management experience. Before joining Vanguard in 1999, he worked at Merrill Lynch as an associate in global debt markets.
Greg earned a B.S. in insurance from The Pennsylvania State University and an M.B.A. in finance from The Wharton School of the University of Pennsylvania. He is a CFA® charterholder and a member of the CFA Society of Philadelphia.
Sara Devereux
Global Head of Fixed Income Group
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Sara Devereux is a principal at the Vanguard Group, in Valley Forge, PA and global head of the Fixed Income Group, which manages over $2 trillion in assets.
This group focuses on portfolio management, trading, and research for Vanguard’s internally managed fixed income funds, including actively managed bond and money market portfolios and bond index portfolios. She is also the chair of the senior investment strategy team for Vanguard’s actively managed fixed income portfolios and a member of Vanguard’s Global Investment Committee.
Prior to her current responsibilities, Sara acted as global head of rates, with oversight of all active rates, money market portfolios and rates-related strategies across the active taxable fixed income franchise. She also had oversight of foreign exchange and derivatives trading activities.
Prior to joining Vanguard, Sara was a Partner at Goldman Sachs, where she spent over 20 years in mortgage-backed securities and structured products trading and sales. Earlier in her career, she worked at HSBC in risk management advisory and interest rate derivatives structuring. She started her career as an Actuary at AXA Equitable Life Insurance.
She has over 25 years of experience in the financial services industry and holds a B.S. in Mathematics from the University of North Carolina at Chapel Hill, and an MBA from the Wharton School at the University of Pennsylvania.
Chris Alwine, CFA
Global Head of credit
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Christopher W. Alwine is a principal and head of the Global Credit Team in Vanguard Fixed Income Group, where he leads a global team of 60 investment professionals responsible for the management of Vanguard’s actively managed credit-sensitive taxable bond portfolios.
Chris joined Vanguard in March of 1990 and has nearly 30 years of investment experience. He has served in multiple roles throughout his career in the Fixed Income Group. His experience includes trading, portfolio management, and credit research. His portfolio management experience spans both taxable and municipal markets as well as active and index funds. He is also a member of the senior investment committee at Vanguard that is responsible for developing macro strategies for the firm’s internally managed active fixed income funds.
He earned a bachelor’s of business administration from Temple University and an M.S. in finance from Drexel University. He is a Chartered Financial Analyst®. He is a member of the Temple University Leadership Council and the Dean’s Council of the Fox School of Business.
Paul M. Malloy, CFA
Head of Municipal Bond Group
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Paul Malloy is head of municipal investment at Vanguard. Previously, he was head of Vanguard Fixed Income Group, Europe. In this role, he managed portfolios that invested in global fixed income assets. He also oversaw Vanguard’s European Credit Research team. He joined Vanguard in 2005 and the Fixed Income Group in 2007 and has held various portfolio management positions in Vanguard’s offices in the United Kingdom and the United States. In past roles, he was responsible for managing Vanguard’s U.S. fixed income ETFs as well as overseeing a range of fixed income index mutual funds.
Paul earned an M.B.A. in finance from the Wharton School of the University of Pennsylvania and a B.S. in economics and finance from Saint Francis University. He is a CFA® charterholder.
Josh Barrickman, CFA
Head of FIG Indexing – Americas
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Josh Barrickman, CFA, is a principal, senior portfolio manager, and head of Fixed Income Indexing Americas. He and his team manage bond index fund portfolios invested in U.S. and international bond markets (including government, mortgage-backed, and corporate securities). The team also manages several bond index ETFs.
Josh, who joined Vanguard in 1998, has more than 15 years of fixed income experience. He is a CFA® charterholder and earned a B.S. at Ohio Northern University and an M.B.A. at Lehigh University.
Our fixed-income ETFs
Our lineup of low-cost fixed income ETFs can help you choose the right product for every client need.
View a quick guide to our fixed income line-upVanguard Fixed Income ETF Comparison
Note: The Investment Product Yield to maturity Percent is the rate of return anticipated on a bond if it is held until the maturity date. Yield To Maturity (YTM) is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate.
Source: Vanguard, as of December 31, 2023.
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