GICs versus Government Strip Bonds

Many people like GICs because they are convenient, safe, and historically have offered a reasonable rate of return. Times change, however, and when one takes into consideration today’s low interest environment, bank GICs may not prove to be the most prudent investment vehicle to grow your RRSP.

By using the services of a Financial Advisor, you can achieve a potentially better return on your money, with the same security and greater flexibility, depending upon your needs. This can be accomplished with strip bonds.

While the term “stripped bond” may sound a little confusing at first, stripped bonds are simply the interest portion of a bond that has been separated, or “stripped” away from the regular portion of the bond, usually referred to as the “principle”. Unlike a GIC, however, you buy a stripped bond at a discount from its value at maturity. With strip bonds then, instead of the investor receiving semi-annual interest payments, the interest compounds and accumulates until maturity. Any part of the bond can be sold on any business day so the owner is not locked in as with many GICs. The yield may vary if sold early, but if the owner keeps the bond until maturity, he/shwill receive the yield quoted when it was purchased.

These bonds can be as safe as “money in the bank”. These bonds are guaranteed for their full amount by either the Government of Canada (which guarantees your bank deposit) or one of the ten Provincial governments. So, why put up with the low returns and inflexibility of GICs when you can achieve the same security with better returns with Stripped bonds sold through a Financial Advisor?

If you would like to learn more about stripped bonds, contact your Financial Advisor or the CARP Retirement & Savings Program Manager at 1 800 563-6623 or e-mail [email protected].

Financial Tip courtesy of Merrill Lynch Canada Inc.