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Guaranteed Investment Certificate – Definition

Guaranteed Investment (Interest) Certificate (GIC) Definition

A guaranteed investment (interest) certificate is a low-risk type of investment with an assured interest rate. These types of deposits are often issued by banks and trust companies in Canada. Since GICs are low-risk products, they are more likely to have lower returns than mutual funds, bonds, and even stocks. This is why they are often preferred as retirement plans. GICs are commonly referred to as term or time deposits but the same is called a Certificate of Deposit in the USA.

A Little More on What is a Guaranteed Investment Certificate

You are probably wondering how GICs work. Well, the certificate is simply a loan that investors give to a bank or an authorized financial institution. The bank will then pledge to repay the invested capital on a particular date in future. This is mainly done by setting a certain interest depending on the duration of your GIC certificate. The return claims that are promised are supported by a good credit rating and financial strength of the institution.

A lot of factors influence the rate of return on a GIC including the length of the term and other interests outlined by the Bank of Canada. It is also highly unlikely to lose your principal unless the financial institution defaults. The Canada Deposit Insurance Corporation guarantees the banks making it difficult to lose your principal investment. How do banks make profits? Most banks will get a tidy profit from the difference between these guaranteed investments and the interest they get from mortgage rates. For example, the Canadian Guaranteed Investments Certificates currently has interest rates lower than 2 percent per year. In other instances, GICs interest rates are pegged on the growth of a stock market index. An example is the Toronto Stock Exchange Index which GICs can use to calculate their interest rates. Such investments are referred to as Market Stock Indexed GICs.

GICs, like term deposits, have a set minimum deposit requirement. The interest accrued can be paid on a monthly, quarterly or even annual basis. Some GICs even pay compound interest at the end of their maturity period.

Types of GICs

There are various kinds of investment certificates such as the aforementioned Market Stock Indexed GICs, fixed-rate GICs and market growth GICs. Another common distinction in the type of GICs includes redeemable and non-redeemable guaranteed investment certificates. Redeemable GICs allow the withdrawal of funds from your invested capital after a set period without charging any penalties. Non-redeemable GICs, on the other hand, have different rules with most providing that any invested sum cannot be withdrawn before the maturity period expires. Common non-redeemable GICs, for example, require you to place funds on deposit for a year and make the funds available once the certificate matures. Some cashable GICs have the same one-year rule and only allow the funds to be withdrawn after an initial period of 30 days.  An investor may choose to invest in a cashable GIC if they feel that they may need to withdraw their funds before the maturity date. However, the interest rate of cashable GICs is often lower than that of non-redeemable certificates.

References for Guaranteed Investment Certificates

Academic Research on Guaranteed Investment Certificate (GIC)

 Islamic bond issuance: what sovereign debt managers need to know, Jobst, A., Kunzel, P., Mills, P., & Sy, A. (2008). International Journal of Islamic and Middle Eastern Finance and Management, 1(4), 330-344. This article provides an overview of the Islamic captial market and the issuance of securities. It provides a guide for foreign sovereign debt managers when buying an selling securities in the Islamic market. It specifically outlines many of the challenges in the market.

From monetary policy instruments to administered interest rates: The transmission mechanism in Canada, Clinton, K., & Howard, D. (1994). The Transmission of Monetary Policy in Canada, 61. The article explores the stability of relationships between some key interest rates such as bond rates and instruments of fiscal policy in Canada. They seek to understand some of the shifts that have occured over the past few years. This is done by explaining shifts in rate differentials, approximating error-correction models and even using cointegration tests. It was concluded that there were some slight visible changes in the short-term behavior of yields in the money market, mortgage rates and prime lending rates from the 1980s to the 1990s. Basic links of the change from policy instruments through short-term rates to bond rates and administered rates were found to be stable.

Priority patterns of acquisition of financial assets, Dickinson, J. R., & Kirzner, E. (1986). Journal of the Academy of Marketing Science, 14(2), 43-49. It is crucial to determine how households amass financial assets as this information influences market segmentation and sales forecasting strategy. The study uses Guttman Scalogram analysis and concludes that there is a systemic priority pattern for ten financial assets in sample canadian households. The results found in the study are then compared to a similar research conducted in the US.

Saving decisions of the working poor: Short-and long-term horizons, Eckel, C., Johnson, C., & Montmarquette, C. (2005). In Field experiments in economics (pp. 219-260). Emerald Group Publishing Limited. This study highlights the predictive capacity for short-term time preference decisions for long-term decisions in investing. It relies on evidence from a specific sample of the working poor in Canada. Each subject was allowed to make decisions that trade off the present money and the future money they receive. The study found that short term preference was a great determinant of long-horizon decisions in investments. No evidence could prove that the preference measures from short-horizon decisions affected the long-term decisions in investments. The study also finds that people are heterogeneous when it comes to discount rates generated by short and long-horizon decisions.

NSPDAs and GICs: Like money in the bank.”, Todd, R. M., & Wallace, N. (1992).”. Federal Reserve Bank of Minneapolis Quarterly Review, 16(3), 2. The insurance industry has changed a lot over the last couple of years.This has included adding other products to their investment portfolio including NSPDAs and GICs. One of the main problems encountered by investors to these firms is that they have little knowledge over what the insurance companies do with their money. The article explores the changed nature of the insurance industry over the last couple of years. This is done by exploring some of the newer products in the industry that include Guaranteed Investment Contracts and single premium deferred annuities (SPDAs). These products are popular because of their high fixed rate of return.

The National Housing Act mortgage-backed securities program in Canada, Witherspoon, I. (1999). Housing Finance International, 13, 17-22.The high cost of accessing mortgages in Canada during the 80’s prompted the Canadian Mortgage and Housing Corporation to look at ways of reducing this cost. Canadians were unable to purchase homes due to the high cost of buying houses. After an analysis of mortgage securitization markets in the US, the corporation found Gimmie Mae to be most appropriate. The canadian model was referred to as Cannie Mae. This led to the introduction of the National Housing Act Mortgage Backed Securities Program (NHAMBS). The National Housing Act guarantees the mortgage loan insurance to help improve access to housing in Canada.

An empirical study of major segmentation issues in retail banking, Laroche, M., & Taylor, T. (1988). International Journal of Bank Marketing, 6(1), 31-48. This is an empirical study of the major segmentation issues that are experienced in retail banking. According to the study, primary financial institutions are associated with a higher frequency of visits. This was also found to be a lower investment decision that was geared towards creating convenience. The research also found that the use of financial services is a decision-making process that is product driven. It recommends that institutions should put more emphasis on product and multi-institution usage research.

A closed-form approximation for valuing basket options, Milevsky, M. A., & Posner, S. E. (1998). Journal of Derivatives, 5, 54-61. One thing that complicates the no-arbitrage valuation .f basket options is that the total sum of  lognormal variables is actually not lognormal. With that being said, a couple of ad hoc approximation techniques have been proposed but none of these have been accurate or have shown satisfactory results. The article proposes adopting the  rec & rocal gamma distribution to approximate the state-price density (SPD) function .f that is the fundamental basket stochastic variable. Compared to a lognormal approximation, this technique works best when the correlation structure of the fundamental basket shows a spec$c decaying pattern.

The Competition for Personal Savings Deposits in Canada: A Comment, Smith, L. B. (1967). Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique, 33(2), 291-294. One of the main objectives of the initial article was to carry out a test to assess the popular view that the differentials in interest rates is one of the primary cause of the decline in popularity of Canadian banks for savings deposit. This commentary questions the conclusion that interest rates did not contribute to the decline of chartered commercial banks.

An Islamic Perspective on Capital Markets and” Islamic” Securities in Malaysia [with Comments], Anwar, M., & Tahir, S. (1995). The Pakistan Development Review, 34(4), 865-878. Essentially, financial systems offer a way for channelling funds from a surplus economic unit that lacks the proper investment opportunities to a deficit unit that offers these opportunities. The units that have surplus will seek returns by investing their funds in economically viable activities while deficit units exploit these surplus economic units. This is done through a network of complex financial entities and markets in the economy. Participants of this networks make financial contracts in a way that suits their needs especially with regards to risk diversification, maturities, liquidity and even denomination [Anwar (1987), pp. 296-297]. Having well-developed Islamic markets will increase capital inflows and monitoring capital flight from these nations.

Public Policy and Venture Capital: The Canadian Labor‐Sponsored Venture Capital Funds, Ayayi, A. (2004). Journal of Small Business Management, 42(3), 335-345. The introduction of labor-sponsored venture capital funds was a significant change in the canadian venture capital industry. The introduction of these LSVCFs  was done to meet the lack of venture capital and to enhance investments in Canadian SMEs. A couple of rules were set to ensure that these funds run smoothly. For example, the LSVCFs invest in entities that have lower than $50 million valuation. The funds also operate as open-ended mutual funds and are even funded by many sole shareholders. The article explores the public policy surrounding labor-sponsored venture capital funds.

Near-Banks: Trust Companies of Canada, Baum, D. J. (1970). Tul. L. Rev., 45, 546. Trust companies are peculiar institutions in Canada. These entities have a variety of functions including administering trusts, getting funds for investments and running as a corporate fiduciary. This article explores the functions of trust companies, their structures and functions that make them almost similar to banks.


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