What Is a Canadian Guaranteed Investment Certificate?
In Canada, a guaranteed investment certificate (GIC) is a deposit investment sold by Canadian banks and trust companies. People often purchase them for retirement plans because they provide a low-risk fixed rate of return and are insured, to a degree, by the Canadian government.
These are marketed in Canada in much the same way U.S. banks market Certificates of Deposit to their customers. In the United States, GICs are created and promoted by insurance companies and have a slightly different client focus.
Key Takeaways
- A guaranteed investment certificate (GIC) is an investment sold by Canadian financial institutions.
- When buying a GIC, investors deposit money in the bank for a fixed length of time, receiving interest on that money and the principal when the investment matures.
Understanding Canadian Guaranteed Investment Certificates
The GIC works much like a certificate of deposit in the U.S. In the case of GICs, you deposit money in the bank and earn interest on that money. The catch is, the money must be deposited for a fixed length of time, and interest rates vary according to how long that commitment is. When you buy a GIC, you are basically lending the bank money and getting paid interest in return for the favor.
GICs are considered safe investments because the financial institutions that sell them are legally obligated to return investors' principal and interest. Even if the bank fails, investors are insured for up to 100,000 Canadian dollars by the Canadian Deposit Insurance Corporation (GDIC).
How Banks Profit From Guaranteed Investment Certificates
A bank's profit is the difference between lending rates and the rates they pay on GICs. If mortgage rates are at 8% and GICs are at 5%, then that 3% difference is the bank's profit.
GICs offer a return that is slightly higher than Treasury bills (or T-bills), making them an excellent option to diversify a stream of liquid, safe securities in a portfolio. As noted above, many Canadian banks and trust companies sell GICs. While a trust company does not own the assets of its customers, it may assume some legal obligation to take care of them.
In these instances, trust companies act as fiduciaries, agents, or trustees on behalf of a person or business entity. They are a custodian and must safeguard and make investment selections that are solely in the interest of the outside party. GICs, along with T-bills, Treasury bonds, and other income-producing securities are often good options in these cases because they are safe, generally liquid, and produce streams of cash, particularly for older investors, retired, and might not have a steady salary anymore.
GICs and U.S. Treasury Securities
Other forms of safe and income-producing securities are U.S. Treasury securities, including T-bills, T-notes, and T-bonds.
- T-Bills mature at either 4, 8, 13, 17, 26, and 52 weeks. They have the shortest maturities of any government bonds. The U.S. government issues T-Bills at a discount, and they mature at par value. The difference between the purchase and sale prices is essentially the interest paid on the bill.
- T-Notes have longer maturity terms of 2, 3, 5, 7, and 10 years slightly. The U.S. government issues Treasury notes at a $1,000 par value, and they mature at the same price. T-notes pay interest semiannually.
- Finally, T-Bonds (also referred to as the “long bond”) are essentially identical to T-Notes except that they mature at 20 or 30 years. Like T-notes, T-Bonds are issued and mature at a $1,000 par value and pay semi-annual interest.
GICs and U.S. government securities can be cornerstones of certain portfolio strategies—either those that rely on safe streams of income or as a base that balances out riskier investments such as growth stocks and derivatives.
I'm well-versed in financial instruments like Guaranteed Investment Certificates (GICs) and U.S. Treasury securities, and I can certainly delve into the details.
Firstly, GICs are an integral part of the Canadian investment landscape. They function similarly to Certificates of Deposit (CDs) in the United States. When you purchase a GIC, you're essentially lending money to a bank or trust company for a fixed period, and in return, you receive a predetermined interest rate. These investments are highly favored for their low-risk nature and government-backed insurance, providing security to investors even if the financial institution fails.
In Canada, the principal and interest of GICs are guaranteed up to a certain limit by the Canadian Deposit Insurance Corporation (CDIC), usually up to 100,000 Canadian dollars per investor. This assurance makes GICs particularly attractive for retirement planning due to their stability and fixed returns.
Now, regarding U.S. Treasury securities, they encompass T-Bills, T-Notes, and T-Bonds, each with distinct characteristics. T-Bills have shorter maturities, ranging from a few weeks to a year, and are issued at a discount to their face value. The interest earned is the difference between the purchase and maturity price.
On the other hand, T-Notes and T-Bonds have longer maturity periods, with T-Notes spanning 2 to 10 years and T-Bonds lasting 20 to 30 years. Both pay semi-annual interest, with T-Bonds maturing at a $1,000 par value, similar to T-Notes.
These U.S. government securities serve as benchmarks for safe, income-producing assets. They're often utilized in portfolios to balance risk alongside more volatile investments like growth stocks or derivatives.
In essence, both GICs in Canada and U.S. Treasury securities serve as secure options for investors seeking stable returns or as foundational components within diversified portfolios, catering to varying risk appetites and financial objectives.
