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What is an interest-bearing guaranteed investment certificate (GIC)?

 An interest-bearing guaranteed investment certificate is a certificate of deposit at a bank or other financial institution for a fixed term, varying from six months to many years. GICs generally pay a higher fixed return than the return on a savings account.

GICs that pay adjusted interest based on changes in a standard, such as a stock exchange index, are index-linked GIC.

What risks do they have?

Interest-bearing GICs are low risk investments. The financial institution that issues the GIC guarantees it and a deposit insurance agency, like CDIC or CUDIC, insures it.

The primary risk of an interest-bearing GIC is that you may need the money before the term is up and have to pay a penalty or fee that will reduce your return, perhaps to zero.

Another risk is that interest rates may rise while you hold a low rate GIC. You may find that inflation is rising faster than the return you are getting from the GIC.

Some financial institutions offer longer-term GICs with an interest rate that is lower in the early years and higher in the later years of the term. A high rate of interest in the final year of a GIC may not be as valuable as it appears. A high interest rate in the final year of a long-term investment may only have a small effect on the overall return of the GIC.

One way to reduce the interest risks is to purchase GICs with various maturity dates, known as a GIC ladder. A GIC ladder behaves like a bond ladder.

Can you sell them easily?

Usually not. Most GICs are designed to be held to maturity. GICs that allow you to redeem before maturity may charge a fee or impose a reduced interest rate. Some GICs let you access your money any time, but these pay very low rates of interest.

What are the costs?

There are no costs to buy and hold a GIC as long as you hold the GIC until it matures.

What are typical returns?

 GICs pay interest on a regular basis and vary widely based on the term you choose and the institution selling it.