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Guaranteed Investment (Interest) Certificate (GIC)



Definition

A Guaranteed Investment (Interest) Certificate (GIC) is a type of Canadian investment that offers a guaranteed rate of return over a fixed period of time. It’s often issued by banks or trust companies. The investor cannot access the invested funds prior to maturity, except under certain conditions.

Phonetic

The phonetics for the keyword “Guaranteed Investment (Interest) Certificate (GIC)” would be:Guaranteed: /ɡær·ən’tid/Investment: /ɪn’vestmənt/Interest: /’ɪntrəst/Certificate: /sər’tɪfɪˌkɛt/GIC: /’dʒiː aɪ ‘siː/

Key Takeaways

<ol><li> Guaranteed Investment (Interest) Certificates (GICs) are low-risk investment instruments: GICs are considered one of the safest investment options available. Because they are insured by the Canada Deposit Insurance Corporation (up to $100,000) in case the bank fails, your investment is secure.</li><li> GICs offer fixed or variable interest rates: One of the key characteristics of a GIC is that it can carry a fixed or a variable interest rate. For the term of the GIC, a fixed rate account will lock in the interest rate. On the other hand, a variable rate GIC will have interest rates tied to the market that may fluctuate during the term.</li><li> GICs have different terms of maturity: The terms of a GIC can vary significantly, ranging from a few months to five years or more. The interest rate is generally higher for longer-term certificates. However, unless it is a cashable GIC, you cannot access your funds before the GIC term ends without incurring a penalty.</li></ol>

Importance

A Guaranteed Investment (Interest) Certificate (GIC) is an important finance term as it signifies a secure form of investment that provides a guaranteed return over a fixed period of time. Usually offered by banks and other financial institutions, GICs are largely risk-free because the initial investment or principal amount is protected, regardless of changes in interest rates or market fluctuations. This makes GICs a preferred choice for conservative and risk-averse investors seeking stable income streams and capital preservation. Additionally, they offer predictability with fixed interest rates, contributing to a balanced and diverse long-term investment portfolio. Therefore, understanding GICs is crucial for sound financial planning and investment strategy.

Explanation

The purpose of a Guaranteed Investment (Interest) Certificate (GIC) is primarily to help protect investors’ principal amount while earning modest interest at a guaranteed rate. It serves as a secured, low-risk investment tool where the principal amount is safe from market fluctuations. When you purchase a GIC, you loan your money to the financial institution for a specified period known as the term, incomes during that term are predictable as they are unaffected by changes in interest rates or stock prices. This makes GICs an excellent choice for conservative investors looking to preserve their capital or those nearing retirement who can’t afford to risk their savings. GICs are also useful for their flexibility and variety as they come in different types, with varying interest rates and terms. Some offer fixed interest rates while others come with variable rates linked to an index. This enables investors to select an option that best suits their financial goals or risk tolerance. For instance, those seeking regular income can opt for GICs that pay out interest periodically. Individuals planning for future expenses or saving for a down payment can consider long-term GICs where interest and principal are payable at maturity. Furthermore, GICs can serve as collateral for a loan, making them a versatile financial tool.

Examples

1. Canada: In the real world, GICs are pretty common in Canada. They are often provided by Canadian banks and other lending institutions. An example would be the Royal Bank of Canada (RBC), which offers numerous types of GICs with varying maturity dates from 30 days to 10 years. Investors select a term and interest rate and have the assurance that the original investment amount is guaranteed.2. Personal Retirement Savings: Another common illustration of a GIC is found in personal retirement savings or pension plans. For instance, an individual looking to invest a part of their retirement savings with less risk might choose a GIC. They could approach a financial institution like a credit union or bank, such as the Toronto Dominion Bank, and invest a portion of their savings into a GIC. Over the time period of the GIC, customers are guaranteed to receive their initial deposit and fixed interest back.3. Business Investment: Businesses can also use GICs as a low-risk investment strategy. For instance, a small business owner in Canada may decide to invest some of the company’s capital in a one-year GIC with a fixed interest rate. This would be done through a commercial banking institution like the Bank of Montreal (BOM). This guarantees that the business owner can earn interest on the company’s capital with no risk of losing the initial investment.

Frequently Asked Questions(FAQ)

What is a Guaranteed Investment (Interest) Certificate (GIC)?

A Guaranteed Investment Certificate (GIC) is a Canadian investment that offers a guaranteed rate of return over a fixed period of time. It’s very low-risk as your initial investment (principal) is protected.

How does a GIC work?

When you buy a GIC, you are lending the bank money for a fixed term (period). In return, the bank pays you interest. The interest rate is determined at the time you purchase the GIC.

What are the varieties of GICs available commercially?

There are several types of GICs available like cashable or redeemable GICs, non-redeemable GICs, Market-linked GICs, foreign currency GICs etc., each with their own sets of features and benefits.

What is the term period for a GIC?

The term period of a GIC can be as short as 30 days to as long as 10 years. The interest rate often correlates with the term length – the longer the term, the higher the interest rate.

What happens at maturity of a GIC?

At maturity, you get back your initial investment (principal) along with the accumulated interest. You have the option to withdraw this money or reinvest into a new GIC.

Are GICs safe investment options?

Yes. GICs are generally low-risk investment vehicles, as they provide a guaranteed return and your initial investment is protected. However, returns are typically less than other investments like stocks or mutual funds.

Are GICs tax-advantaged?

Interest earned on a GIC is taxable, unless it’s held in Registered accounts like RRSP, RESP, RRIF, or TFSA.

Can I cash out my GIC before the maturity date?

This depends on the type of GIC you bought. Non-redeemable GICs typically do not allow you to access your funds before maturity without a penalty while certain types like cashable or redeemable GICs do allow early encashment.

How is the interest calculated on a GIC?

Interest on a GIC is typically calculated annually or semiannually and can be paid out or compounded (i.e. added to your principal to earn more interest).

: Where can I purchase a GIC?

: GICs can be purchased from Banks, Credit Unions, Trust Companies, or other financial institutions. You can also purchase them through investment brokers and advisers. Please note: While investing in GICs, it’s important to consider your overall financial plan and risk tolerance. Always consult with an investment professional or financial advisor to understand if GICs are suitable for your investment portfolio.

Related Finance Terms

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