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James, please correct me if my understanding is wrong.

In your scenario, my marginal tax rate would be applicable on 1.10% and the balance of 0.72% would be treated as a taxable gain.

$1,000 investment
$11 interest: after tax $5.11 (53.53% tax rate)
$7.20 capital gain: after tax 5.27 (26.76% tax rate)
$10.38 total after tax (1.038%)
Agree with the overall theme - discount bond is better after tax, however the math is a little more complicated than your breakdown. The yield to maturity (1.82%) assumes reinvestment of the coupon interest (1.1%) on each payment date at 1.82% until 2031 which you are unlikely to earn. Most significantly there is the tax leakage leaving only 5.11 to reinvest, rather than $11 assumed. So, part of the expected 1.82% total return is not likely to be realized.

In addition, as noted, a small part of the total return (1.82%) is this interest earned from reinvestment of the coupon interest. Therefore the capital gain is not just the difference between the two percentages.

Easier to calculate the expected capital gain by use of the clean price you will pay for the bond. If you hold to maturity your gain is the difference between this price and par.

Also, worth noting if you buy the bond between payments you will pay accrued interest. This is “interest paid” and should be used to reduce interest earned on your taxes in the first year.
 

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Thanks very much for the concise explanation. The advantage over a HISA really dwindles because the interest available to reinvest is less than half (in my case).

It would be great if the CDIC limit was increased and eliminate the need to open multiple accounts.
 

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Easier to calculate the expected capital gain by use of the clean price you will pay for the bond. If you hold to maturity your gain is the difference between this price and par.
Thanks for the detailed explanation, that really covers the complications.

The price of the bond is roughly 93.60. For for $10k face value, one pays $9360 and there is a guaranteed $640 capital gain at maturity.
 

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Initiated a 1/2 position in Verizon (VZ) at $56.20 in my RRSP. Currently at 6% cash in equity portion of overall portfolio. Have set some sell orders in place but still waiting for the limit price to be hit.
 

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Thanks for the detailed explanation, that really covers the complications.

The price of the bond is roughly 93.60. For for $10k face value, one pays $9360 and there is a guaranteed $640 capital gain at maturity.
Happy to help. While bonds are fixed income the math is anything but simple. The CMHC guarantee and the capital gain illustrated by your price is a no brainer if one is planning to hold 10 year bonds to maturity.
 

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Thanks very much for the concise explanation. The advantage over a HISA really dwindles because the interest available to reinvest is less than half (in my case).

It would be great if the CDIC limit was increased and eliminate the need to open multiple accounts.
Happy to help. I didn't really focus on the HISA. Re; the conclusion - wouldn't the HISA also be subject to tax leakage? If so, I believe the CMHC covered bond is still superior (subject to the assumptions given). The capital gain component is additional return and is both taxed at a lower rate, and deferred really helping the bond.
 

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Bought 12k of Capital Power and 12K of Emera with the proceeds from a bond redemption. I am deviating from my traditional fixed income holding percentage. I refuse to invest bond proceeds back into a bond with a 2% yield. Utilities will become my default option for fixed income.
 

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Utilities will become my default option for fixed income.
This is sort of a no-win situation. Fixed income rates are so low that they have a negative real return. As inflation kicks in (It seems to be already), rates will slowly increase. But I would like to see at least a percentage point or more over the inflation rate before going back to bonds or GICs.

Problem with higher yielding alternatives like regulated utilities is that their share price will drop as rates increase. To some unknown degree and well before full effect of inflation is present. The 4 or 5% yield might look attractive, but the Total return might eventually be low or even negative.

I own a lot of utilities, but will keep a close watch. They do still offer a significantly higher yield than most fixed income. But then so do the banks!
 

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Invest in utilities, financials, consumer staples during inflation.

 

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Invest in utilities, financials, consumer staples during inflation.
Which utilities are included in that INFL ETF he talks about?

I talked about regulated utilities. Ones where their input costs will go up yet they are unable to increase their prices. Or at least are unable to increase their dividends. As a result, share prices must drop if their yield is to remain competitive with increasing interest rates. As a result, Total Return drops.

If you want another opinion: Rick Stuchberry discusses interest rates and utility stocks
 

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Which utilities are included in that INFL ETF he talks about?

It talked about regulated utilities. Ones where their input costs will go up yet they are unable to increase their prices. Or at least are unable to increase their dividends. As a result, share prices must drop if their yield is to remain competitive with increasing interest rates. As a result, Total Return drops.

If you want another opinion: Rick Stuchberry discusses interest rates and utility stocks
Good point, INFL has no utilities stocks. The main sectors of that ETF are materials, financials and energy.
 

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I bought some CMHC bonds, which are AAA federally backed government bonds, maturing in 2031 with a coupon of 1.10 and yield of 1.82%
It seems that my broker also finds my new bond very attractive, because even though this isn't a margin account, they have borrowed the bond out of my account.

My statement shows that they have borrowed 92% of my government bond. Only 8% of my position is shown as 'segregated' in my account. This is the only security in my account they are borrowing.

I have seen this happen to stocks I hold in a margin account, but it's the first time I've seen it happen with a bond in a non margin account. Has anyone seen this before? Are brokers allowed to do this?
 

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Bought $20k CNR yesterday, but today used up remaining small amount of spare cash to buy a higher risk corporate (Morguard) that yields 3.5% with ~3 yr call/maturity. Holding position!
 

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Happy to help. I didn't really focus on the HISA. Re; the conclusion - wouldn't the HISA also be subject to tax leakage? If so, I believe the CMHC covered bond is still superior (subject to the assumptions given). The capital gain component is additional return and is both taxed at a lower rate, and deferred really helping the bond.
The HISA would also be subject to the tax leakage, but with the HISA rates slightly higher, the difference would be very, very thin, not to mention the long yield to maturity of the bond.
 
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