The Basics of Ontario Savings Bonds

Ontario savings bonds are savings bonds that are issued by the province of Ontario, Canada. There are three different types of Ontario savings bonds: fixed-rate savings bonds, step-up rate bonds and variable-rate bonds. The principal and interest are both backed by the provincial government. That means that, unless Ontario suffers a complete financial collapse, the investors will get their money back. Like federal Canadian bonds, Ontario bonds can be purchased at banks, trust companies and participating credit unions. Investors can also buy them from Ontario-based investment dealers. Unlike federal Canadian bonds, Ontario savings bonds are sold only to Ontario residents.

Understanding Ontario Savings Bonds

The Canadian government has been using savings bonds to raise money since World War II. But it wasn't until 2001 that the Ontario provincial government decided to issue bonds of its own.

Like other public savings bonds, Ontario savings bonds allow the issuing government to raise money for various large-scale projects without raising taxes. When an investor buys an Ontario savings bond, he or she will get a guarantee that the provincial government would repay that back after a certain period. The date when the investor will get repaid is known as the maturity date. The investors will receive annual interest payments until the maturity date is reached.  The interest rates vary depending on the type of bond and the year that the bond was issued. The prices of the bonds themselves vary a great deal. They can be as low as $100 or as high as $500,000.

There are three types of Ontario savings bonds. Each type has its own strengths and weaknesses, something which investors should keep in mind when they decide what they will buy.

Fixed-Rate Ontario Savings Bonds

This type of the Ontario savings bond has fixed interest rates. This means that it will remain the same until the date of maturity. The interest rates are reset every year depending on market conditions. So, for example, if the investor buys a fixed-rate Ontario savings bond in 2010, he or she will receive interest payments at 2010 rates until the bond matures.

Investors get some choice regarding the maturity date of their fixed-rate Ontario savings bonds. They can choose between bonds that mature in three years, seven years and ten years. For 2010, the interest rates are set at 2.50 percent for three-year bonds, 3.75 percent for seven-year bonds and 4.25 percent for ten-year bonds.

Step-Up Rate Ontario Savings Bonds

In this type of Ontario savings bond, the interest rate increases every year. For the step-up rate Ontario savings bonds sold in 2010, the interest rates are set at 1.00 percent for the first year, 2.00 percent for the second year, 3.00 percent for the third year, 3.75 percent for the fourth year and 4.25 percent for the fifth year.

All step-up rate Ontario savings bonds mature in five years. However, investors have an option of redeeming them before maturity. In other words, they can ask for their money back ahead of time. They can do that on June 21 and December 21. By redeeming the bond early, they forfeit the remaining interest payments.

Variable-Rate Ontario Savings Bonds

In this type of Ontario savings bond, the interest rate is adjusted based on the market conditions. Traditionally, the interest rate was reset every six months, but for the savings bonds issued from 2009 onward, it has been reset every year. For variable-rate Ontario savings bonds purchased in 2010, the interest rate starts out at 1.25 percent.

All variable-rate Ontario savings bonds mature within three years. Yet, as with step-up rate Ontario savings bonds, investors can redeem their bonds early. In this case, they must redeem them on June 21 only.

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