Guaranteed Investment Certificates (GICs)
GICs are offered by various financial institutions such as chartered banks, credit unions, trust companies and life insurers. When you purchase a GIC, you are effectively lending your money to the issuing company in exchange for a guaranteed rate of interest and the return of your capital at some point in the future.
GICs are available in a wide variety of terms such as 1, 2, 3, 4, 5 and 10 year terms. Generally the longer the term, the higher rate of interest you will earn. However, GIC investors should be careful about locking their money in too long of a term without considering which direction interest rates are likely to move.
Laddering Maturities
Because forcasting the direction of interest rates can be difficult at times, in is often most prudent for GIC investors to purchase GICs of varying lengths. This strategy is know as laddering. For example, suppose you wanted to invest $50,000 in a GIC for 5 years. Instead of simply purchasing one 5 Year GIC, you might consider the following:
|
Initial Purchase |
Reinvest Upon Maturity | |||
| 1 Year GIC | $10,000 | → | 4 Year GIC | $10,000 |
| 2 Year GIC | $10,000 | → | 3 Year GIC | $10,000 |
| 3 Year GIC | $10,000 | → | 2 Year GIC | $10,000 |
| 4 Year GIC | $10,000 | → | 1 Year GIC | $10,000 |
| 5 Year GIC | $10,000 | N/A | ||
|
Total |
$50,000 | |||
By structuring your GIC purchase in this fashion, you will have $10,000 maturing each year for the next 5 years. You can then reinvest each $10,000 sum for the required number of years remaining. If interest rates rise over the course of your investment, then you will benefit by reinvesting at higher rates. It also provides the added benefit of increased liquidity.
For the latest GIC rates and income strategies, please contact us.
