Saving Bonds - Your Guide To US, UK & Canadian Savings Bonds

savings bonds Canada

saving bonds traderHaving looked at both the US and UK markets for saving bonds, let's now consider the products and markets available for Canadian investors. 

The Canada savings bond was created by the Government of Canada in 1946, in order to help Canadians save more efficiently and effectively, having originally been introduced as Victory War Bonds. Over the years the bonds have fallen in and out of favour, largely due to the significant fluctuations in interest rates, which have been mirrored in many other countries in the Western world. The interest rates in Canada peaked at 21% in the early 1980's and have since declined dramatically.  As recently as 2004, the Department of Finance was giving serious thought to scrapping Canada Saving Bonds altogether as with falling sales and increasing costs, it was felt that the bonds were no longer an attractive finance vehicle for most Canadians. The finance minister at the time Ralph Goodale , rejected the idea, and instead opted to make the bonds more competitive and attractive for investors. He was quoted as saying at the time  "The option of eliminating the Canada Savings Bonds Program is not on the table as part of this review. We are looking to update and improve our retail debt strategy, not to end Canada Savings Bonds." Many Canadians still rely on CSB's as part of their portfolio, and ironically it seems the younger generation are more keen,  so let's have a look at the current saving bonds and see if they are an attractive investment option.

 

canada savings bonds ( CSB)

Canada saving bonds are available in two types, namely the regular interest bonds and compound interest bonds, both of which are backed by the Canadian government and therefore 100% secure. The new series bonds are issued each year over a 6 month period from early October to the 1st April. Until recently the saving bonds could only be purchased in paper form, and indeed this was one of the major criticisms of the bonds, as they were not available in electronic format. This has since been changed and the bonds can now be purchased both electronically and as certificates. They can be purchased through a Payroll Savings Plan, or included as part of a Registered Retirement Savings Plan. Now each type of savings bond has different characteristics, so let's have a look at each in turn in the following tables.

regular interest savings bonds

Regular interest bonds are the simplest form of saving bonds, where interest is paid annually based on rates set by the Department of Finance. When the bond is first issued a rate is set, and this then changes over the life of the bond as market condition change, and these may change for short or longer periods, depending on the prevailing economy. The interest is paid annually. The full details are as shown below:

Information Details
Denominations Available $300, $500, $1,000, $5,000 and $10,000
Interest Interest is paid annually direct to a bank account or sent by cheque on the anniversary of the issue date or on redemption
Denomination R - Regular Interest Series
Tax All interest must be declared for tax - a T5 slip is issued to the bond holder where interest exceeds $50 annually
Maturity Period Ten years
Interest Rates Announced on issue and amended periodically throughout the life of the bond and come into effect for shorter periods. Interest rates are changed to reflect market conditions. The current rate for S113 ( 01/04/08) series bonds in year 1 is 2.45%
Maximum Holding $500,000 in any one series
Redemption Saving bonds can be redeemed at any time. However if within the first three months, only the original face value will be returned. For redemption mid way through the year, interest will be paid for each full month.
Payroll Savings Regular Interest Bonds are not eligible for the Payroll Savings Scheme
RSP/RIF Schemes Regular Interest Bonds are not eligible for these  schemes
Buying Bonds Only Canadian residents are eligible. They can be jointly owned, held in trusts, estates, charities, or sole proprietorships. In addition they can be held by minors.
Issue Dates Available from early October to 1st April
Purchase costs Nil

 

compound interest savings bonds

Now unlike the regular interest bonds, compound interest bonds pay interest which is them compounded. In other words the interest is added into the value of the bond and interest is paid on a larger capital sum. So any interest is added back into your original investment, which in turn then starts to earn interest. So if we invested $1000 at a 5% interest rate, at the end of year one we would have accrued $50 in interest. This would then be added to our capital which is now $1050, and at the end of year 2 we would then earn $52.50 ( instead of $50 as we are now 'compounding' our interest) At the end of year three would then earn interest on $1102.50 which would be $55.12. So compounding interest is a great way to save as you earn interest on previous interest payments which have been added into the capital of the bond. Let's look at the key points for a compound interest savings bond.

Information Details
Denominations Available $100, $300, $500, $1,000, $5,000 and $10,000
Interest Interest is automatically re-invested annually so your savings grow more quickly until the bond is redeemed or reaches maturity
Denomination C - Compound Interest Series
Tax All interest must be declared for tax - a T5 slip is issued to the bond holder where interest exceeds $50 annually
Maturity Period Ten years
Interest Rates Announced on issue and amended periodically throughout the life of the bond and come into effect for shorter periods. Interest rates are changed to reflect market conditions. The current rate for S113 ( 01/04/08) series bonds in year 1 is 2.45%
Maximum Holding $500,000 in any one series
Redemption Saving bonds can be redeemed at any time. However if within the first three months, only the original face value will be returned. For redemption mid way through the year, interest will be paid for each full month.
Payroll Savings Regular Interest Bonds are eligible for the Payroll Savings Scheme. You can invest with as little as $2 per week
RSP/RIF Schemes Regular Interest Bonds are eligible for both these  schemes
Buying Bonds Only Canadian residents are eligible. They can be jointly owned, held in trusts, estates, charities, or sole proprietorships. In addition they can be held by minors
Issue Dates Available from early October to 1st April
Purchase costs Nil

 

how to buy a savings bond

Now I guess the question everyone wants answered is, are these good or not so good investments, and should you consider them as part of your long term investing strategy. We'll, to try to answer the question, which also applies to many other of the saving bonds we have looked at, it really comes down to your view of risk, and reward. These are low risk ( in fact no risk ) investments. With no risk comes low rewards, but your money is safe and it will not fluctuate like capital invested in the stock markets. My personal view would be to invest in the compound interest bonds as compounding always works in your favour, and I would certainly include them as part of a broader investing strategy where we are looking for a balance between high risk and low risk investments. As in all investing we want to try to spread our risk as much as possible. I've included a compound interest calculator here, so you might like to try a few figures for yourself - Compound Interest Calculator - this will pop up in a new window. Just as an example, $100,000 invested over 10 years ( 5% interest rate)  and with compound interest applied would be worth $162,889.46 at maturity. The same sum where no compound interest is applied would be worth only $150,000 - quite a difference.

You can buy Canada saving bonds at many different places, but here are just a few to get you started.

1. They can be ordered on line Canada Savings Bonds

2. Call 1 888 773 9999 toll free, Monday to Friday from 8 am to 8 p pm ET

3. At most banks, credit unions, caisses populaires or trust companies .

4. On line through your investment broker or discount brokerage

5. Through your Payroll Savings Program

Now finally I cannot leave a page on Canadian saving bonds without mentioning the Canadian premium bonds.

premium bonds Canada

Now the Canada Premium Bond is not the same as the UK Premium bond - in fact it is very different. The CPB is very similar to the CSB but has a higher rate of interest, so you might ask why you would bother with a lower rate regular interest bond. The simple answer is that the premium bond can only be cashed once a year, whereas the saving bonds can be cashed at any time. So in return for locking your money up for a year, you are rewarded with a higher interest rate. They offer a guaranteed rate of return and are available both as regular and compound versions. So if you can afford to tie your capital up for the long term, I would consider the compound interest premium bond as the best of all the above options. Alternatively, if you feel you may need access to your cash at short notice, then opt for the compound savings bond. And finally, where do I believe interest rates are heading in the short term? - the short answer is probably downwards as recession takes hold in the UK and US in the next 12-18 months - thereafter is anyone's guess. If you would like any further information on these or any other of the saving bonds outlined above please just click the link which will take you to the Government of Canada site

Finally, let's take a look at the broader bond markets and expand our horizon a little by looking at more risky forms of savings bonds.

Saving Bonds - next page