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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.

Call Date

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.

Maturity Date

The date on which the issuer will have to return the principal along with any gained interest.

Issuers

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.





11 Comments, Comment or Ping

  1. 1. Andrew F

    Does BMO offer any non PPN callable GICs? The one you linked to was an equity linked GIC. What kind of rate differentials are offered versus non-callable GICs?

  2. 2. Heather Ashton

    Hi… I see that the BMO callable GICs are not insured by CDIC – see: http://www4.bmo.com/popup/0,2284,16287289_16654978,00.html – your thoughts?

    I see that some credit unions offer considerably higher interest rates than the banks and the principal is insured without limit, e.g. some Manitoba offer 2.250% on a 1 year GIC – at least one offers a cashable one with a drop in rate to 1%. Why wouldnt these be a better option than the bank callable GICs?

    Thanks!

  3. 3. Will D

    Can you trade these things? If so, is there any market for them?

  4. 4. Gregg

    Speaking of guaranteed investments, has anyone bought the Canadian Mint’s Exchange Traded receipts that offered buyers direct beneficial ownership of gold with no intermediaries, such as an asset manager or counterparty? The ETRs are listed on the Toronto Stock Exchange in Canadian and U.S. dollars.
    I am curious if these can be held in TFSAs and RRSPs.

  5. 5. Clark

    @Andrew F: AFAIK, BMO does not offer any other callable GICs apart from the one I linked (see link below).

    http://www4.bmo.com/termproducts/navigator/0,4739,35649_25138242,00.html

    As for rates, I think one will have to read the prospectus for the callable GIC to be able to compare differentials as it is not listed among the other GICs shown below.

    http://www.bmo.com/home/personal/banking/rates/gic-term-deposits?nav=tools

  6. 6. Clark

    @Heather Ashton: CDIC does not insure GICs with a date of maturity more than 5 years. However, since the callable GIC is for 5 years and yet not insured, I am assuming that CDIC may have reservations about insuring an equity-linked product.

    Not all credit unions are members of CDIC (see link below). So, if the credit union you are referring to is a member, then I don’t see why one should not opt for their product.

    http://www.cdic.ca/e/insuredWhere/insuredWhere.html

  7. 7. Clark

    @Will D: Callable GICs, like regular GICs, cannot be traded.

  8. 8. DanP

    @ Clark

    No Credit unions are members of CDIC as far as i know. They are insured at a provincial level and not a federal level. The great part is that almost all credit unions don’t have limits to the amount of insurance, as opposed to CDIC which is maxed at 100k.

  9. 9. Heather

    @ Clark; @ Dan P

    The credit union GICs I was referring to are in Manitoba and Dan is right – they are insured by provincial entities in each province not by the CDIC and there is no limit to the principal that is covered.
    fyi… current rates for a 1 year cashable GIC at MAXA Financial and at Outlook Financial are both 2.250% They are both cashable – you forfeit the interest in the case of MAXA if you cas out early but Outlook will still play 1%… seems like a deal to me… anyone know of better rates?

  10. 10. Clark

    @DanP; @Heather: Thanks for the insight.

    @Heather: I have not dealt with a credit union yet to offer better rates.

  11. 11. Nathan

    The callable GIC you linked for BMO was only available in November 2007, and did not continue that series after the recession.

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