Canadian Savings Bonds

Canadian savings bonds are very much similar to US savings bonds minus a few tax and maturity rate differences. Canadian savings bonds are considered very low risk because of their backing by the Canada Bank and the great surplus of the Canadian government. The Canadian savings bond program was almost closed down because of the lack of necessity for Canada to raise general purpose funds; instead the program was changed to favor investors and is still in service today.

How the Bonds Work

Different governments all have different savings bond programs. The Canadian government has established a very simple, very traditional way to purchase savings bonds. Even to this day, Canadian savings bonds cannot be delivered electronically and are still issued as certificates printed on paper. Also, Canadian savings bonds are brokered in different dollar denominations, starting at just $100. There are two distinct types of Canadian savings bonds offered by the Canada Bank for purchase by investors.

Regular Canadian Savings Bonds

Regular savings bonds can be cashed in at any time, making them an obvious better bet over US savings bonds. The interest rate is guaranteed for one year after which differing market conditions will determine the interest rate for the last 9 years. The interest rates for Canadian savings bonds can either be paid on a regular basis in disbursements or be compounded further into a bigger investment. Long term investors prefer the compounded returns, while income investors are more likely to accept the interest payments as a means to survive and generate a retirement income.

Canadian Premium Savings Bonds

These are the preferred investment, as they pay more than the regular bonds, but have a different interest rate schedule. Premium savings bonds are guaranteed returns for 3 years, with each year after the first garnering a higher interest rate. After the three years of guaranteed returns, the interest rate fluctuates with the market for the remaining 7 years. Liquidating a premium bond is difficult, as it can only be done on the anniversary of the bond or up to 30 days after. Investors in these kind of bonds must be certain they are willing to lock up investment capital for a year; otherwise the investor must wait one full year before he or she can liquidate the assets. These bonds have lost some favor with investors after the initial rules were changed to a 5 year fixed return to a 3 year fixed return.

Why Not to Buy a Canadian Savings Bond

Short term investors will most likely not realize any benefit from a Canadian savings bond. The rates on the short term are relatively small, similar to the returns of other "cash" investments, but do not have the huge tax advantages of US savings bonds. US Dollar denominated investors may prefer Canadian bonds as a way to make money on the changing exchange rate between the US dollar and the Canadian Dollar. US investors should not invest in premium bonds unless they're willing to accept a larger amount of risk; due to the liquidation period existence of just 30 days out of the year, investors must weigh future movements out one year in advance.