David F. Andrews B Comm CFP CLU TEP
Fixed Income Investing is a term generally used for Bonds, but we will include GIC investments in the same discussion.
The concept of guarantees is critical to many clients, but what are the real variables?
In a Guaranteed Investment Certificate (GIC) or Term Deposit, the income is guaranteed and the capital is guaranteed at maturity, backed by an insurance guarantee from a third party (IE: CDIC)
With a Government Bond, the income is guaranteed and the capital is guaranteed at maturity. You may exchange it for cash, before maturity by selling it, but the price is not guaranteed at that time and may be more..or less...
With Corporate Bonds, the income is guaranteed and the maturity value is guaranteed, but only based on the corporations ability to pay. The corporation may default and the guarantee may prove worthless.
Income from Bonds and GIC's
The Income received from a GIC is an interest payment as is the interest payment received from a bond. While bonds may provide the opportunity to earn a capital gain, Over time the anticipated return will normally average out to the interest rate.
Laddered Portfolios
Typically longer investment terms provide higher rates of return. With a GIC that would be a 5 year term. Locking up everything for 5 years would mean potentially missing an opportunity if interest rates went up in the interm. In an ideal world, one would own a series of 5 year deposits with 1/5th maturing each year. This is described a laddered portfolio. The same startegy can be used with bonds. The GIC industry has developed a Laddered GIC Investment. At the outset, the deposit is divided into 5 maturities, Year 1-5 all earning (for example) the 4 year year rate. As the first year matures, it is re-invested at the current 5 year rate. Then year 2, 3 etc. until you have 5 deposits at 5 years.
Tax Implications
Interest payments are the least tax efficient method of earning income in non-registered accounts. As inflation increases, comparisons of the after-tax income from a GIC will often lag the Cost of Living, resulting in a reduction in purchasing power.
