3.1 The Fixed-Income Marketplace, Bond Terminology & Security

Canadian Securities Course CSC

Track your progress as you read

Finished sections get a check mark.

1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

3.1 The Fixed-Income Marketplace, Bond Terminology & Security

Key Takeaways Explain This Topic AI

Governments are the largest issuers in the Canadian bond market, and bonds trade over the counter through dealers.

Bonds are quoted as a percentage of par, so a price of 98.50 means $985.00 per $1,000 bond.

A trust indenture is the contract between the issuer and a trustee who acts for all bondholders.

In Canadian usage, a bond is secured by specific assets, while a debenture is backed only by the issuer's general credit.

Last updated: October 2026

The Fixed-Income Marketplace

The Canadian bond market is larger by value outstanding than the stock market, and governments (federal, provincial and municipal) are its largest issuers. Corporations issue the rest. Almost all bonds trade over the counter through investment dealers rather than on an exchange.

Investors hold fixed-income securities for several reasons:

Income: regular, predictable interest payments.

Safety of capital: high-quality government bonds are repaid in full at maturity.

Diversification: bond prices often rise when stocks fall during recessions.

Capital gains: bond prices rise when interest rates fall.

Understanding a bond starts with its basic terms.

Core Terminology of Fixed-Income Securities

A fixed-income security is a debt instrument that obligates the borrower (issuer) to pay the lender (investor) a specified stream of interest income and return the principal amount at a predetermined future date. To analyze fixed-income securities in the Canadian financial marketplace, you must understand several core contractual terms.

Par Value, Face Value, and Principal

The par value (also termed face value or principal ) is the stated nominal dollar amount that the issuer agrees to repay to the bondholder at maturity. In Canada, corporate and government bonds are typically issued in denominations of $1,000, $10,000, or $100,000, though retail trading is standardized around a $1,000 base unit.

Coupon Rate and Nominal Yield

The coupon rate (or nominal yield ) is the annual contractual rate of interest paid on the par value. For example, a bond with a $1,000 par value and a 5.50% coupon pays $55.00 in total interest annually. In Canada, standard market practice dictates that bond coupons are paid semi-annually . Thus, the investor in a 5.50% bond receives two equal payments of $27.50 every six months.

Maturity Date and Term Classifications

The maturity date is the final date on which the loan contract terminates and the issuer must repay the remaining principal to the investor. Fixed-income securities in Canada are grouped by term to maturity:

Short-term: a common convention, used by the FTSE Canada bond indexes, is 1 to 5 years to maturity (money market instruments mature in one year or less).

Mid-term (intermediate): 5 to 10 years.

Long-term: more than 10 years (commonly 20 or 30 years for major government and infrastructure issues).

Definitions vary by source, so follow the term ranges given in a question.

Price Quotation Conventions: Points and Percentages

Canadian fixed-income securities are quoted as a percentage of par value , where 100 points equals 100% of par:

Trading at Par: A bond priced at 100.00 trades at exactly 100% of par ($1,000 for a $1,000 bond). At par, the bond's yield to maturity matches its coupon rate.

Trading at a Discount: A bond priced below 100 (e.g., 97.50 ) trades below its face value ($975.00 per $1,000 bond). Bonds trade at a discount when prevailing market interest rates rise above the bond's coupon rate.

Trading at a Premium: A bond priced above 100 (e.g., 104.25 ) trades above its face value ($1,042.50 per $1,000 bond). Bonds trade at a premium when prevailing market interest rates decline below the bond's coupon rate.

Clean Price vs. Dirty Price and Accrued Interest

When a bond trades between coupon dates, the buyer must compensate the seller for the interest accrued from the last coupon payment date up to (but not including) the settlement date:

Dirty Price (Settlement Price) = Clean Price (Quoted Price) + Accrued Interest \text{Dirty Price (Settlement Price)} = \text{Clean Price (Quoted Price)} + \text{Accrued Interest} Dirty Price (Settlement Price) = Clean Price (Quoted Price) + Accrued Interest

In Canada, bond accrued interest is calculated using an actual/365-day convention (counting the actual number of elapsed days divided by 365). If a bond is in default and pays no interest, it trades "flat" , meaning no accrued interest is added to the clean price.

The Trust Indenture and the Role of the Trustee

A bond is not merely an informal promissory note; it is a complex, legally binding contract known as a trust indenture (or deed of trust). The indenture is signed between the issuing corporation and a designated trustee .

Why a Trustee is Required

Because an issue of corporate debt may be held by thousands of individual and institutional investors across the country, it is legally impractical for each creditor to negotiate terms, hold security deeds, or monitor corporate financial health individually. Instead, the corporation appoints an independent, federally or provincially licensed trust company to act as the collective fiduciary representative for all bondholders.

Primary Responsibilities of the Trustee

Authenticating Securities: Certifying that the number and value of bonds issued match the limits established in the indenture.

Holding Collateral: Retaining physical or electronic custody of pledged mortgage titles, security deeds, or financial collateral.

Monitoring Covenant Compliance: Scrutinizing the issuer's quarterly and annual financial statements to verify compliance with financial ratios and debt restrictions.

Administering Sinking and Purchase Funds: Overseeing the regular receipt of retirement funds and conducting redemptions or market buybacks.

Representing Creditors in Default: If the issuer breaches a covenant or fails to make scheduled payments, the trustee issues a formal notice of default, accelerates principal repayment, or initiates legal proceedings to seize and liquidate pledged collateral on behalf of all bondholders.

Secured Bonds vs. Unsecured Debentures in Canada

In American parlance, the term "bond" is often used as a blanket synonym for any long-term debt instrument. In the Canadian securities industry, however, there is a strict and critical legal distinction between a bond and a debenture .

Secured Bonds

A bond is a fixed-income security that is backed by a mortgage or specific physical or financial collateral owned by the issuer. If the issuer defaults, the trustee has the legal right to liquidate those specific pledged assets to satisfy the bondholders' claims.

First Mortgage Bonds: Represent a first charge or senior mortgage on specified physical assets, such as real estate, manufacturing plants, or utility facilities. They carry the lowest default risk among corporate debt. Indentures often contain an after-acquired clause , which automatically attaches the bond's security lien to all future real estate or plants acquired by the company.

Collateral Trust Bonds: Issued primarily by holding companies that own minimal physical real estate. Instead of physical property, the debt is secured by financial assets—such as shares, bonds, or notes of operating subsidiaries—deposited directly with the trustee.

Equipment Trust Certificates (ETCs): Used extensively in capital-intensive transportation sectors (railroads, commercial airlines, shipping). Under the traditional "Philadelphia Plan," legal title to the rolling stock or aircraft remains with the trustee until the entire debt issue is completely retired. The company merely leases the equipment; upon default, the trustee can immediately reclaim the equipment without lengthy bankruptcy litigation.

Unsecured Debentures

A debenture is a debt instrument backed solely by the general creditworthiness, reputation, and earning power of the issuing corporation. No specific property or collateral is pledged to secure the loan. If the company fails, debenture holders become general unsecured creditors.

Senior Debentures: Rank ahead of other unsecured debt and preferred shares, holding a primary claim on all unencumbered corporate assets.

Subordinated Debentures: Junior debt that contractually agrees to rank below senior debentures, bank loans, and other designated creditors in liquidation. Because subordinated debentures carry higher credit risk, they offer higher coupon yields and are frequently issued with a conversion feature (convertible debentures) to attract investors.

Comparison of Debt Security Types

Security Type Specific Collateral Pledged Priority in Liquidation Relative Yield Primary Canadian Issuers

First Mortgage Bond Specific real estate, factories, physical plant Highest among bondholders Lowest corporate yield Regulated utilities, pipeline operators

Equipment Trust Certificate Rolling stock, aircraft, freight containers Senior claim on pledged equipment Low to intermediate Canadian National, Canadian Pacific, major airlines

Collateral Trust Bond Subsidiary shares, bonds, financial notes Senior claim on deposited securities Intermediate Conglomerates, multi-tiered holding companies

Senior Debenture None (General credit and unpledged assets) Senior among unsecured obligations Intermediate Major chartered banks, industrial firms, telecoms

Subordinated Debenture None (General credit) Junior to all senior debt and bank facilities Highest corporate yield Financial institutions (Tier 2 capital), growth companies