Canadian Guaranteed Investment Certificate (GIC)

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. Individuals often purchase them for retirement plans since they give an okay fixed rate of return and are insured, to a degree, by the Canadian government.

These are marketed in Canada similarly 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 center.

Understanding Canadian Guaranteed Investment Certificates

The GIC works similar as a certificate of deposit in the U.S. On account 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 differ as indicated by how long that commitment is. At the point when you buy a GIC, you are essentially lending the bank money and getting paid interest in return for the blessing.

GICs are viewed as safe investments in light of the fact that the financial institutions that sell them are legally obligated to return investors' principal and interest. Even assuming the bank falls flat, 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. In the event that mortgage rates are at 8% and GICs are at 5%, 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 expand a stream of liquid, safe securities in a portfolio. As noted above, numerous Canadian banks and trust companies sell GICs. While a trust company doesn't possess the assets of its customers, it might expect a legal obligation to take care of them.

In these instances, trust companies act as guardians, agents, or trustees for a person or business entity. They are a custodian and must safeguard and make investment selections that are exclusively in the interest of the outside party. GICs, along with T-bills, Treasury bonds, and other income-delivering securities are often great options in these cases since they are safe, generally liquid, and produce streams of cash, particularly for more established investors, retired, and might not have a steady salary any longer.

GICs and U.S. Treasury Securities

Other forms of safe and income-creating securities are U.S. Treasury securities, including T-bills, T-notes, and T-bonds.

• T-Bills mature at either 4, 13, 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 a similar price. T-notes pay interest semiannually.
• At last, T-Bonds (likewise alluded to as the "long bond") are essentially identical to T-Notes except that they mature at 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 depend on safe streams of income or as a base that balances out more dangerous investments, for example, growth stocks and derivatives.

Highlights

• While buying a GIC, investors deposit money in the bank for a fixed length of time, getting interest on that money and the principal when the investment matures.
• A guaranteed investment certificate (GIC) is an investment sold by Canadian financial institutions.