# Market-linked GICs early redemption



## caseymac (Sep 8, 2021)

Hello
I have a series of market-linked 5yr GICs that were purchased 1.5 to 2 years ago by my mother, who has since passed away. With the settlement of the estate I have a one time opportunity to redeem them prior to maturity (receiving the capital only). The maximum returns are 18 -25%. (min 2.75 - 4%). This is not an investment I would have ever made myself – I am less risk adverse and have a much longer investment timeline (not a fan of set redemption date and also not a fan of the rate at which interest income is taxed). The timing of the investments was also not well thought-out – there is a large amount maturing in the same tax year. So I have to decide if the opportunity cost of the 1.5 to 2 years that have already passed make them worth keeping. The alternative would likely be a managed portfolio (growth, at least 80% equity) or growth ETFs.
Has anyone ever bad to make a similar decision? Or just have an opinion to share?
Thanks


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## Spudd (Oct 11, 2011)

So at minimum, you're looking at 1% per year for a 3-year GIC, essentially. That's competitive to what a big bank would give you if you went out today and bought a 3-year normal (not market-linked) GIC. 

If she bought 1.5 years ago, though, that sounds like it might have been in the depths of the pandemic market crash. If so, you might be looking at maximum returns. That would mean 25%, or 8.3% per year for the remaining 3 years. 

So basically you're guaranteed to get somewhere between 1% and 8% per year on your money if you keep them. 

If you sell them and invest in a balanced portfolio or growth ETF, you have no guarantees. It depends on your risk tolerance whether you are willing to tolerate that risk, and whether you think you can beat the returns of the GIC's by taking that risk.


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## Money172375 (Jun 29, 2018)

caseymac said:


> Hello
> I have a series of market-linked 5yr GICs that were purchased 1.5 to 2 years ago by my mother, who has since passed away. With the settlement of the estate I have a one time opportunity to redeem them prior to maturity (receiving the capital only). The maximum returns are 18 -25%. (min 2.75 - 4%). This is not an investment I would have ever made myself – I am less risk adverse and have a much longer investment timeline (not a fan of set redemption date and also not a fan of the rate at which interest income is taxed). The timing of the investments was also not well thought-out – there is a large amount maturing in the same tax year. So I have to decide if the opportunity cost of the 1.5 to 2 years that have already passed make them worth keeping. The alternative would likely be a managed portfolio (growth, at least 80% equity) or growth ETFs.
> Has anyone ever bad to make a similar decision? Or just have an opinion to share?
> Thanks


Find out what the underlying index(es) is for the GIC and what they were trading at on the date of purchase. This will help you decide if they were bought during a peak or a trough.


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## AltaRed (Jun 8, 2009)

They still have to be valued on date of death for her Final T1 return, and then valued again via the T3 Testamentary Trust before disbursement. I am not sure how they would be valued for those purposes. All that comes into play before they are distributed 'in kind' or actually 'matured' and paid out as original capital.


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## spiritwalker2222 (Nov 7, 2017)

I would just cash them out to lock down the value to settle the estate.


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## Covariance (Oct 20, 2020)

caseymac said:


> Hello
> I have a series of market-linked 5yr GICs that were purchased 1.5 to 2 years ago by my mother, who has since passed away. With the settlement of the estate I have a one time opportunity to redeem them prior to maturity (receiving the capital only). The maximum returns are 18 -25%. (min 2.75 - 4%). This is not an investment I would have ever made myself – I am less risk adverse and have a much longer investment timeline (not a fan of set redemption date and also not a fan of the rate at which interest income is taxed). The timing of the investments was also not well thought-out – there is a large amount maturing in the same tax year. So I have to decide if the opportunity cost of the 1.5 to 2 years that have already passed make them worth keeping. The alternative would likely be a managed portfolio (growth, at least 80% equity) or growth ETFs.
> Has anyone ever bad to make a similar decision? Or just have an opinion to share?
> Thanks


If I understand correctly your financial decision is 1.Now; receive a return of the original investment (only, no income or capital appreciation) or 2. Wait until maturity and receive the pay-out according to the terms of the market linked GIC.

If those are the options I would pull the details on the reference index (the market link), date/price of index at inception of investment, along with the method of return calculation specified in the agreement. You can post it here if you want and we'll help you through the evaluation. There may be a good gain or nothing depends on the calculations. It's fairly straight forward to evaluate the present value as it is a combination of a GIC and derivative(s) on the reference index(s).

Note: when you are reading the information from the provider on these things the "returns" are not necessarily an annualized return that you are reading. They are often quoted as a return over the entire term which is quite lower obviously. So the notes are important.


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## Covariance (Oct 20, 2020)

AltaRed said:


> They still have to be valued on date of death for her Final T1 return, and then valued again via the T3 Testamentary Trust before disbursement. I am not sure how they would be valued for those purposes. All that comes into play before they are distributed 'in kind' or actually 'matured' and paid out as original capital.


Valuation is the sum of the present value of the components; it's a minimum of a GIC with guaranteed interest for the term and two derivatives - long call on index, short call on index at higher strike (cap). (European calls)


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## caseymac (Sep 8, 2021)

Covariance said:


> If I understand correctly your financial decision is 1.Now; receive a return of the original investment (only, no income or capital appreciation) or 2. Wait until maturity and receive the pay-out according to the terms of the market linked GIC.
> 
> If those are the options I would pull the details on the reference index (the market link), date/price of index at inception of investment, along with the method of return calculation specified in the agreement. You can post it here if you want and we'll help you through the evaluation. There may be a good gain or nothing depends on the calculations. It's fairly straight forward to evaluate the present value as it is a combination of a GIC and derivative(s) on the reference index(s).
> 
> Note: when you are reading the information from the provider on these things the "returns" are not necessarily an annualized return that you are reading. They are often quoted as a return over the entire term which is quite lower obviously. So the notes are important.


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## caseymac (Sep 8, 2021)

Yes, your understanding of my financial decision is correct, and the returns are over the full term in all cases, not annualized. For example, there are "MarketSmart" GICs linked to the S&P/TSX Banks Index with max return 25% over the 5 yr term. The variable return is calculated as principal x (ISL - IBL) / IBL. The index settlement level (ISL) is the closing level of the index the day before maturity. These were bought before the covid crash - 36 months ago when the index base level (IBL) was 3,439.78 and 33 months ago when the index base level was 3,408.76. The current index level is 4,095.00 so the current variable rates of return are about 19 and 20% with 3 or more years to go until the settlement date.

There is also a MarketSmart GIC linked to the S&P/TSX Capped Utilities Sector Index with max return 18% over the 5 year term and variable return calculated by the same method as above. It was bought 18 months ago in the the midst of the crash when the base index was 203.26. The current index level is 338.96 so the current variable rate is at the max 18% (horrendous given that the index has more than doubled, but I guess barring another crash it will mature at the max).


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