GICS vs Bonds

With the worldwide economy still in flux, one would be wise to be very careful with the investments they enter their funds in. Should one go for the lower-risk but low-reward investments, or should one roll the dice and take a chance on high-risk but potentially high-yield investments? That can be a conundrum. Two of the investment options available are the Guaranteed Investment Certificate (GIC) and bonds, but one would do well to understand the significant differences of each of them.

The Guaranteed Investment Certificate (aka GIC) is a form of investment certificate in Canada. It is characterized for its guaranteed rate of return after a pre-determined period of time has passed. This guarantee is monitored and enforced by the Canada Deposit Insurance Corporation. With a GIC, the person who invests in one makes an agreement to keep the funds untouched until the prescribed time has expired or, in financial terms, has “matured.” Think of it as the company the person invested in a GIC with is being lent the money and agrees to pay the investor for it and secures that return through insurance regardless of the outcome. A GIC is a very low-risk investment. However, this also means the returns on it are not as lucrative as other similar investments. There are options for a higher yield GIC offered by some bank and trust companies, such as Market Growth GICs, but these have a comparative risk factor wherein interest can be lower or even nil (as these types of GICs’ return is based on market trends and growth).

A GIC can be classified as registered or non-registered. Most GICs start with an investment of at least $500.00. The interest rate can vary depending on different variables, but is often under 10 per cent per annum. The length of time for a GIC is also variable, being anywhere from six months to several years (up to ten years). It can even be very similar to a bank deposit account. Regardless of the length of term, a GIC can be cashed at the end of the said term as taxable income, though the option of renewing the investment for a new term is available (and often encouraged for obvious reasons). There is also an option of withdrawing early from the agreement, but this is not ideal as often the agreement for a GIC will include a stipulation that no interest will be paid or even that the investor will have to pay a fee in doing so.

At the other end of the spectrum, a bond works in a very similar fashion. Whereas GICs are offered solely in Canada, bonds are offered in most other countries, particularly in the United States. It is also not limited to bank and trust companies as bonds can be released by companies, municipalities, states, and national governments (as in the case of Treasury bonds or bills aka “T-Bills”). The funds invested in these bonds are then utilized by the issuer for different activities (often, for further profitability or increase in returns). Just like a GIC, a bond specifies a rate of interest and when the principal investment will be returned. The length of time for a bond can also be quite different depending on the issuer (corporate and municipal bonds typically range in years while Treasury bonds can be anywhere from 90-days to decades). In between, the issuer also receives a fixed interest rate which is often returned semi-annually (i.e., every six months). There are a large variety of bonds with associated returns, different terms, and concurrent risks involved from fixed-rate bonds, to war bonds, to bearer bonds. Some are even “liquid,” as in the case of a callable bond where there is no fixed maturity date, and the investor can cash it at any time without penalty.

Investment options are something every person should consider, particularly as they reach a certain age. Knowing about GICs and bonds as well as others of their ilk can be significant in deciding how one invests his or her hard-earned money for future returns.

Summary:

1.Both a Guaranteed Investment Certificate (GIC) and a bond are investment options where an issuer agrees to pay the creditor interest over time and the principal amount after a period of time agreed upon.
2.A GIC is a form of investment available in Canada issued by bank and trust companies and is insured by the Canada Deposit Insurance Corporation.
3.A bond is an investment available in most parts of the world which can be issued by companies, municipalities, and on the national level.
4.GICs are generally low-risk but have lower potential returns and have few options. Bonds can vary depending on the issuer and the type the investor chooses.

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