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While you can think of GICs as low-risk assets, they offer a broad category of selections. There are several types of GICs available in Canada. We'll go over the most common ones here.
A cashable GIC allows the holder to redeem the principal (the initial investment) and interest earned on the GIC before the maturity date. This type of GIC is ideal for investors who may need access to their funds before maturity. However, in exchange for the flexibility, you will receive a lower interest rate than a non-redeemable GIC.
A non-redeemable GIC has penalties for withdrawing your money early. If you withdraw funds early, you will lose all interest earned or a portion of it. However, you will receive a higher interest rate than cashable GICs. This type of GIC is ideal for investors who do not need access to their funds and are looking for a higher interest rate.
Fixed rate GICs offer a fixed interest rate for the life of the investment. This means that you will know exactly how much interest you will earn on your investment. This can be helpful for budgeting purposes. Furthermore, this type of GIC offers lower risk than other investments.
With a variable rate or market-linked GIC, the interest rate you receive is tied to the performance of a specific investment or index. Your interest rate can go up or down depending on how the investment or index performs. This type of GIC can be riskier than other types, but it also offers the potential for higher returns. However, most market-linked GICs provide a minimum guaranteed return with a maximum limit.
GICs also vary in terms of maturity dates. Short-term GICs have maturity dates typically one year or less, while long-term GICs have maturity dates greater than one year. Long-term GICs, such as 5-year GICs, usually offer higher interest rates than short-term GICs, such as 1-year GICs, but they also tie up your money for a more extended period.
Foreign currency GICs earn interest in a foreign currency. This type of GIC can be helpful for investors who want to diversify their portfolios or hedge against currency risk. For example, if you think the Canadian dollar will decline in value, you could invest in a foreign currency GIC denominated in US dollars. If the Canadian dollar declines in value, your investment will be worth more in Canadian dollars.
Registered GICs have preferential tax treatment. For example, RRSP GICs have deferred taxes, while TFSA GICs earn interest completely tax-free! Registered GIC rates are often the same as non-registered GIC rates. Many banks and credit unions also have lower minimum investment requirements for registered GICs, making them easier to get into.
Initially, you will need to determine if your GIC interest is compounded monthly or annually. This will be specified in the term sheet of your investment. The following formulas are to calculate the closing balance at the end of the specified period.
Once you have found the closing balance, you can subtract your initial investment to calculate the interest earned. Note that these formulas will be inaccurate if you withdraw money or your interest rate changes. Otherwise, you can use our GIC calculator to solve this for you.
ROI is calculated as what you made divided by what you paid. This can simplify to profit/initial investment. For example, if your 3-year GIC investment yielded interest of $1,000 from a $10,000 investment, your ROI would be as follows.
If you prefer an annualized return then you will need to use the compound annualized growth rate formula (CAGR). The formula is:
Your inputs would be:
Therefore, your annual growth rate would be 3.23%, while your 3-year ROI would be 10%.
GIC interest rates are based on the prime rate of your financial institution. The prime rate is individually set by each financial institution and can change. However, most GICs have a fixed interest rate, which means that the interest rate will not change for the term of the GIC.
Compound interest is when you earn interest on your initial investment and any interest that has accumulated in the past. This can help your money grow more quickly than if you were only earning interest on your initial investment.
The following formula can be used to calculate compound interest on a lump-sum investment:
Most financial institutions offer GICs with specific terms. Often they offer 1-year GIC, 2-year GIC, 3-year GIC, 4-year GIC and 5-year GIC. There are also short-term GICs, such as 3-month GICs and 6-month GICs. A few financial institutions, like Community Trust, offer the option to choose your own maturity. Community Trust is a subsidiary of Questrade Financial Group, and also administers QuestMortgage.