# Index-linked GIC questions



## jtmann (Nov 5, 2009)

Hello:

I have some questions for the forum re: index-linked GICs. I have some funds that I will need in two years. I want them to get (or at least have chance of getting) better than the 2.2% top rate for high interest savings. Need the principal in two years so can't risk a loss. My questions:

1. Other than the above am I missing any no risk options - please don't flame me with "mattress" 

2. Of the index-linked GICs, other than surfing every FI's site, is there a portal that discuss these and which is "best" and factors to look at

Thanks!


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## bltman (Aug 12, 2010)

I suggest staying away from these. My wife has a similar type of investment from National Bank that she purchased in early 2008. The rules are so confusing I have no idea what it will ultimately pay (its for 8 years) and I have not touched it since transferring her portfolio to Investorline. 

Why not split the amount you have between low risk interest account or GICs and a high risk investment. For example, if you have $10,000, put $9,600 in your interest bearing note and invest $400 in a high risk investment. That way, after 2 years your $9600 will be worth $10,000 with the $400 that you invested completely in your hands to determine how risky you want to go.


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## fatcat (Nov 11, 2009)

> Why not split the amount you have between low risk interest account or GICs and a high risk investment. For example, if you have $10,000, put $9,600 in your interest bearing note and invest $400 in a high risk investment. That way, after 2 years your $9600 will be worth $10,000 with the $400 that you invested completely in your hands to determine how risky you want to go.


 exactly, this is what i was going to say also, then you get to choose your own investments


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## slacker (Mar 8, 2010)

Anyone know what are the pro's and con's of these indexed GIC's ? My mom has them, and I have a bad feeling about it.


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## warp (Sep 4, 2010)

As bltman said,,these linked gic's and notes can be very confusing.

i do know that what the financial institution does is sell you a market linked product maturing in several years ,,then immediately use your money to buy a stripped bond that matures at the same time...to protect your principal.

In the prospectus are hidden several "outs" that the institution has...they call this a 'credit event"......which allows them to apy you NOTHING but your original principal until the maturity date.

I know this from experience from years ago.

Be sure that ANY product sold to you by these banks and institutions have complicated rules designed so you cant figure them out...and every clause is for their benefit and not yours.


Just accept the HISA , if you cant afford to lose the money.

By the way...where are you getting 2.2% ?


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## fatcat (Nov 11, 2009)

> Hello:
> 
> I have some questions for the forum re: index-linked GICs. I have some funds that I will need in two years. I want them to get (or at least have chance of getting) better than the 2.2% top rate for high interest savings. Need the principal in two years so can't risk a loss. My questions:
> 
> ...


i guess i am under-coffeed this morning, i missed your original post

revelstoke credit union is offerring a floating rate 18 month gic at .25 below prime (currently 2.75% for 18 months) it will go up if the rate goes up and down if it goes down (both scenarios are unlikely at the moment, i think it will just stay where it for a while)

this would be a good option for you and wouldn't need to go into any investments


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## andrewf (Mar 1, 2010)

The problem with these is that in taxable accounts, they are taxed very unfavourably. What you can do instead of these investments is to combine vanilla GICs and a long-term equity market option.

For instance, if vanilla GICs offer 4% for a five year term, for every $1000 you have now to invest, put ($1000/1.04^5)=$821.93 in a GIC and you will get your initial capital of $1000 back (less taxes). You can then use the remaining $178.07 to buy an equity option for the index, or to buy index ETFs/mutual funds. The former offers more leverage but has the potential to expire worthless. The latter is less leveraged, but you have a high probability of getting at least 70% of your original investment back. Either way, the majority of this income will be taxed less harshly than interest income. If you do incur a capital loss, you can carry it forward to offset other capital gains you might experience in the future.

You can also tune your risk tolerance a bit more by guaranteeing less of your original principle (that you only get $900 back guaranteed, but have a higher potential for return). If you're looking at this though, you should probably consider why you want a GIC rather than a balanced portfolio of equities and bonds.


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## bltman (Aug 12, 2010)

bltman said:


> I suggest staying away from these. My wife has a similar type of investment from National Bank that she purchased in early 2008. The rules are so confusing I have no idea what it will ultimately pay (its for 8 years) and I have not touched it since transferring her portfolio to Investorline.


To follow up on my point above that the rules are so confusing for these instruments, below you will find a link to the 40+ page information statement for the notes that my wife purchased in 2008. 

http://admin.fpsgroup.ca/Documents/11420_Information_Statement_EN.pdf?60900

The thing is so complex that I really can't make out the calculations. Still trying to figure out if the market crash in the fall of 2008 reset the starting point for measuring performance to my wife's benefit or not (its so confusing). The only thing clear is that National Bank can redeem these after 4 years by paying what amounts to 10% interest but I would be shocked if they chose that route. 

One interesting thing is that National Bank set up a system for trading these. The $100 per unit paid in 2008 has fluctuated between $102 and $104 since July.

Again, I suggest staying away from these crazy types of investments.


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## jtmann (Nov 5, 2009)

AcceleRate



warp said:


> As bltman said,,these linked gic's and notes can be very confusing.
> 
> i do know that what the financial institution does is sell you a market linked product maturing in several years ,,then immediately use your money to buy a stripped bond that matures at the same time...to protect your principal.
> 
> ...


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## Belguy (May 24, 2010)

http://www.fiscalagents.com/newsletter/4gic_indexlinkedgics.shtml


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## Eclectic12 (Oct 20, 2010)

jtmann said:


> Hello:
> 
> I have some questions for the forum re: index-linked GICs.
> My questions:
> ...


In response to #1 - some of the later posters suggest a DIY approach. 
Take a look, run the numbers but make sure you are comfortable with
what you'd have to do and make sure you understand the mechanics.

In response to #2 - I'm not aware of a portal.


My approach when I bought one was to ask while I was in the branch:

a) how are the payout calculated?
If the formula is not clear or overly complicated, avoid the product as you'll have no way to confirm the payout.

b) what limit's the payout?
A clear answer you are comfortable with is what you are looking for.

c) how does the bank make money on this product?

d) Is there any provision for the bank to terminate early?
If so, what would be paid.


The result was that my roommate and I bought three year products, tracking the same index. I was paid out simple interest of 30% where his was capped at 10%.

Given that the best regular GIC at the time paid 2%, I was happy with the result.

I did notice that a lot now have caps and in some cases are callable after part of the term. So I'd add to the list making sure that the cap is reasonable.


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## Belguy (May 24, 2010)

(1) Never invest in anything that you do not completely understand.

(2) Always fully understand the fees that you are paying and determine if you feel that you are getting good value in return as opposed to just making the provider richer. Guarantees always come at a cost!!

(3) After doing the above due diligence, I have never invested in index linked GIC's myself. I prefer going the broad-based, low fee, asset allocated route!


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## atrp2biz (Sep 22, 2010)

These products are nothing more than the purchase of zero coupon bonds and equity index call options. 

Let's say you have $10,000 to invest for a two year period. To replicate these products, one can simply purchase a zero coupon government bond and purchase at-the-money index calls expiring in ~2 years with the difference between the face value of the bond and the discounted price of the bond. Although taxes would have to be paid every year with the unrealized interest from the bond, this is a simple way to replicate these products and ensure no middle man profits from these "advanced" products (minus commissions of course--and fine print).

Returns with this strategy are also very transparent. If the options are ITM at expiry, the difference between the index and the strike multiplied by the number of contracts is your profit. If the options are OTM, you get your money back.

Or what Andrew said.


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