Callable Guaranteed Investment Certificates (GIC)
As known to most investors, a Guaranteed Investment Certificate (GIC) offers security of principal and provides a fixed or variable (if linked to the Prime Rate or Equity Markets) rate of interest/return, albeit lower than other investment vehicles such as stocks, for locking in the principal for a specific time period. The longer the time period, the better the interest rate.
The investment is guaranteed by CDIC and there are penalties for redeeming the GIC before the maturity date, if such an earlier redemption option is included. The penalty could be the application of a lower rate of interest for early redemption or no interest for short-term GICs.
In the US, the same investment vehicle is known as a Certificate of Deposit (CD) and backed by the FDIC. Please note that though the principal of a market-linked GIC is guaranteed, it may or may not be eligible for CDIC coverage; check with your issuer rather than making assumptions.
Callable GIC – The Issuer
Similar to GICs, a callable GIC offers a fixed rate of interest, usually higher than a conventional GIC. The distinction is that the issuer (generally a bank) holds a call option on the GIC and has the ability to call or redeem the GIC before the date of maturity, based on predetermined conditions.
A callable GIC helps the issuing body to transfer the risk of interest rate changes to the investor. If interest rates decrease, then the issuer can exercise their option to call the GIC. Doing so will allow them to borrow money at a lower rate of interest than they are paying on the existing callable GIC. It should be noted that it is only an option available to the issuer and there is no requirement that they should call the GIC at the time of an interest rate change.
Callable GIC – The Investor
From an investor’s standpoint, a callable GIC offers a higher rate of interest and would be suitable if the economic outlook indicates stability of interest rates. Generally, callable GICs may have a minimum period before which the issuer cannot call the GIC. Hence, it is better for an investor to calculate their return by using that protected time period, which would be guaranteed, rather than the maturity date that is prone to the call risk. With the interest rate risk being shifted to the investor, a callable GIC becomes worthwhile for the investor only due to the higher rate of interest offered.
Some key terms associated with callable GICs are detailed below.
A set date on or after which a callable GIC can be redeemed by the issuer before it reaches maturity. The issuer will have the option to either redeem or let the GIC reach maturity.
The date on which the issuer will have to return the principal along with any gained interest.
As far as I can tell, BMO seems to be the only big player in the market offering a callable GIC. If interested in such investments, also speak to your local credit union as they may offer some of their own.
Have you purchased a callable GIC for your portfolio? Did it get called by the issuer? If so, did you still get a decent return on your investment?
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.