A guaranteed investment (interest) certificate is a deposit investment security that Canadian banks and trust companies sell. Individuals and investors often purchase these for retirement plans because they provide a low-risk fixed rate of return. The principal is at risk only if the bank defaults.
Breaking Down Guaranteed Investment (Interest) Certificate (GIC)
A bank's profit is the difference between mortgage rates and guaranteed investment (interest) certificate (GIC) rates. If mortgages are at 8% and GICs are at 5%, then the bank makes 3%.
GICs offer a return that is slightly higher than Treasury bills (or T-bills), making them an excellent option to diversify a stream of liquid, safe securities in a portfolio. As noted above, many Canadian banks and trust companies sell GICs. While a trust company does not own the assets of its customers, it may assume some legal obligation to take care of them.
In these instances, trust companies act as fiduciaries, agents, or trustees on behalf of a person or business entity. They are a custodian and must safeguard and make investment selections that are solely in the interest of the outside party. GICs, along with T-bills, Treasury bonds, and other income-producing securities are often good options in these cases because they are safe, generally liquid, and produce streams of cash, particularly for older investors, retired, and might not have a steady salary anymore.
Guaranteed Investment (Interest) Certificate: GIC and U.S. Treasury Securities
Other forms of safe and income-producing securities are U.S. Treasury securities, including T-bills, T-notes, and T-bonds.
- T-Bills mature at either 4, 13, 26 and 52 weeks. They have the shortest maturities of any government bonds. The U.S. government issues T-Bills at a discount, and they mature at par value. The difference between the purchase and sale prices is essentially the interest paid on the bill.
- T-Notes have longer maturity terms of 2, 3, 5, 7, and 10 years slightly. The U.S. government issues Treasury notes at a $1,000 par value, and they mature at the same price. T-notes pay interest semiannually.
- Finally, T-Bonds (also referred to as the “long bond”) are essentially identical to T-Notes except that they mature at 30 years. Like T-notes, T-Bonds are issued and mature at a $1,000 par value and pay semi-annual interest.
GICs and U.S. government securities can be cornerstones of certain portfolio strategies—either those that rely on safe streams of income or as a base that balances out riskier investments such as growth stocks and derivatives.