By Jason A. DeJean, CFO, PFP, EPC, CPCA
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It is also important to understand how bonds work especially in a rising interest rate environment. Bonds are typically liquid because they trade on an open market. They will mature at full value if held to maturity. A key point that’s important to remember. What they are not is guaranteed through Canadian Deposit Insurance Corporation (CDIC). When interest rate rises they drop the value of an equivalent bond purchased previously. As an example, imagine if an investor purchased a $1000 two-year bond paying 2% last year. Now, interest rates rise, and that same bond is being sold paying 3%. Would anyone want to buy the bond paying 2%? They may but ONLY if the bond was sold at discount. This means sold for less than the $1000 originally paid. Investors holding bonds have a couple of options. One is to accept the volatile of the bond knowing it will mature at the originally value or look at bond funds or laddered bonds that can take advantage of rising interest rates.
Now, what if you invested in a Broadly Diversified Portfolio?
Taxes are different on the Gain in a Broadly Diversified Portfolio.
This example;
35% of $10,000 invested in interest income 100% taxable at 32%
65% of $10,000 invested in Capital Gains at 50% taxable at 32%
Broadly diversified portfolio $10,000 investment over One Year
... over Five Year
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