These days, it seems, you can’t go anywhere without hearing how the markets are doing. But when Peter Mansbridge says that the S&P/TSX Composite Index has fallen 200 points, he’s only talking about one part of the market — the stock market.

There’s a lot more to the markets than just equities, though. The bond market is actually far bigger than the stock market and, in many ways, these securities are more important to countries and companies than stocks are. Every investor needs to buy bonds, so here’s what you need to know before getting into the market.

What are bonds?

Many countries and corporations raise money by issuing government or corporate bonds, also known as fixed income. Investors essentially lend money to a government or company by buying bonds; the money is then used to help organizations finance various projects.

When the bond’s term is up — they usually come in maturities of one, three, five, 10, 20 and 30 years — investors get their money back. Think Canada Savings Bonds, but on a larger scale.

Bonds are safer than equities

Bonds are, generally, safer than stocks, which is why most investment experts recommend that we all have some bonds in our portfolios. The safest investments are government bonds, because it’s unlikely a country won’t pay back its debt obligations.

Corporate bonds are riskier, because a business is more likely to go bankrupt rather than a government, but there are companies — especially big, multinational ones — that are nearly as safe as a country.

The riskier the asset, the more money you’ll make Because you’re lending money by buying fixed income, you get interest rate payments over the duration of the bond’s lifetime. That payment depends on the bond’s yield. The less risky the asset, the lower the yield and the less money you’ll make in interest.

For instance, a two-year Government of Canada bond yields 0.97 per cent, compared to 2.22 per cent for a 10-year bond — the longer time frame is more uncertain, which is why it’s riskier. Government of Canada bond yields are lower than yields from corporate bonds. A six-year Bank of Montreal bond, for example, pays about three per cent. The more risk a company has of defaulting, the higher the yield will be.

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