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Email this7:41 pm
December 18, 2024
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Any thoughts or experiences?
Useful for TFSA, RRSP, or RRIF?
Avoid capital gains?
Avoid earned interest to claim on T5?
Any concerns with Canada only, USA only or both mixed?
In the case of non registered. How is gain classified and taxed?
Buy any time of year?
Buy in a specified date range as specified by financial institution?
Matures during a market decline. Is a negative impact?
11:56 pm
October 21, 2013
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These have been discussed extensively in previous threads.
In general, the opinion here was negative on them. Among other issues, they tend to have a relatively low cap on what you can earn; there are no dividends for you on the underlying stocks; you risk earning nothing at all; they all have arbitrary market timing. etc etc. Any income from these will be taxed as interest income., i.e. full rate. They are just a marketing gimmick for people who complain about low GIC rates. Read fine print on these carefully and make sure you understand it fully before you buy.
5:59 am
March 30, 2017
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The issuing bank / advisor / whoever sells it to you, they make a combined 2-4% fee upfront.
While the principal protection is not a gimmick and real, you are "paying for that insurance", in the form of much lower potential return and being tax as interest income (basically gave up the dividend, the dividend tax credit, ur capital gain is now 100% taxable, no capital gain 1/2 inclusion break) as Loonie already points out.
It's no different from paying a mutual fund manager 2%+ to "manage your money", when you can pay 12bps and use ETFs for market exposure.
Also be very careful that some may only offer limited downside protection, once the level is breached, you are exposed to the entire downside, not from the level onward.
6:32 am
April 27, 2017
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You can usually get a better and more transparent deal by buying a standard 5 year GIC with 90% of your money and putting the rest into the stock market.
7:27 am
April 6, 2013
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An earlier thread discussed them.
They are not risk free. Don't get bamboozled by the flawed reasoning that it is risk free because the principal is guaranteed. One is risking the interest.
Right now, five-year Oaken GIC is 3.7% per annum. $100,000 will become $119,920.60 in five years. Placing the $100,000 in a market linked GIC is risking $19,920.60. Think about that.
8:48 am
December 18, 2024
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Thanks…..I got it!
Was leery as wondered about waisting 5 years of guaranteed interest and getting zero.
And wonder if the FI is making money from it no matter what….like good for them and not you.
Won’t do! Thanks everyone.
@mordko Not a bad idea……but I know I would loose on that for sure. Been there small time, tried it, lost no money, gained no money. 
9:28 am
April 6, 2013
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Yes, the market-linked GIC issuer is making money no matter what.
The issuer isn't investing the GIC funds in the stocks. Most of the money is lent out as funds from a regular GIC would be. The remaining money is used to buy an index call option.
If the market tanks or doesn't go up over the term of the market-linked GIC, the call option expires worthless. But, then the issuer doesn't pay any interest on the GIC. The GIC principal is repaid from repaid loans and some of the loan interest received.
If the market soars over the term of the market-linked GIC, the call option is worth a fortune before it expires. Issuer sells the call option and uses the proceeds to pay the market-linked interest and some of the principal. The remaining GIC principal is repaid from some of the loan payments received.
10:36 am
April 27, 2017
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GIC-Fanatic said
@mordko Not a bad idea……but I know I would loose on that for sure. Been there small time, tried it, lost no money, gained no money.
You can’t “loose” on that. If you invest 90% in a straight CDIC insured GIC, it will return more than 100% of your original capital. 10% invested in TSX won’t go to zero (hypothetical worst case) and might double.
It's basically an instrument similar to “market GIC” with bullet proof downside protection, better tax efficiency, small market exposure, pocketing of dividends and no upper threshold if market does better than usual.
11:01 pm
October 21, 2013
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Norman1 said
Yes, the market-linked GIC issuer is making money no matter what.The issuer isn't investing the GIC funds in the stocks. Most of the money is lent out as funds from a regular GIC would be. The remaining money is used to buy an index call option.
If the market tanks or doesn't go up over the term of the market-linked GIC, the call option expires worthless. But, then the issuer doesn't pay any interest on the GIC. The GIC principal is repaid from repaid loans and some of the loan interest received.
If the market soars over the term of the market-linked GIC, the call option is worth a fortune before it expires. Issuer sells the call option and uses the proceeds to pay the market-linked interest and some of the principal. The remaining GIC principal is repaid from some of the loan payments received.
I don't know how you came by this info and am not disagreeing, but I have also read that the FI invests the money in dividend paying stocks of high quality. FI scoops the dividends. I've forgotten the details of how this works.
4:56 am
April 6, 2013
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Loonie said
I don't know how you came by this info and am not disagreeing, but I have also read that the FI invests the money in dividend paying stocks of high quality. FI scoops the dividends. …
The counterparty who writes the call option may do that. But, that is too risky for the issuer of the market-linked GIC to do. When the GIC matures in three years or five years, the issuer has to make good on the principal. There will be a serious problem for the issuer if the GIC principal was invested in the stocks and the markets have gone down. The current value of the stocks plus the dividends received would be less than the original principal.
Market Linked Certificates of Deposit from J. P. Morgan describes what an issuer does:
Anatomy of a MLCD
The example on page 4 illustrates a point to point MLCD linked to an equity index. As illustrated in figure 1, when creating a MLCD the issuer first uses a portion of the available assets to structure a zero coupon bond that matches the maturity date and principal amount of the MLCD. Unlike regular bonds, zero coupon bonds are issued at a discount to their face value and do not pay interest. This allows issuers to structure a bond that will return $1,000 at maturity for an upfront investment by the issuer of less than $1,000 today. The difference between the bond’s value at maturity and the amount paid represents the bond’s implied return.
Zero coupon bonds are issued at a discount to their face value. The discount provides MLCD issuers excess capital to invest. In this example, issuers will use this money to structure call options on a broad based equity index, such as the S&P 500 Index. A call option gives an investor the right (but not the obligation) to buy an investment in the index at a specific price within a predetermined period of time. The call options typically have an expiration date that matches the maturity date of the zero coupon bond, along with a “strike price,” or entry point, that matches the current value of the index. If the underlying asset (the S&P 500 Index) increases in value, the value of the call option will also increase.
…
5:14 am
March 30, 2017
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Norman1 said
Loonie said
I don't know how you came by this info and am not disagreeing, but I have also read that the FI invests the money in dividend paying stocks of high quality. FI scoops the dividends. …
The counterparty who writes the call option may do that. But, that is too risky for the issuer of the market-linked GIC to do. When the GIC matures in three years or five years, the issuer has to make good on the principal. There will be a serious problem for the issuer if the markets have gone down and the current value of the stocks plus the dividends is less than the original principal.
Market Linked Certificates of Deposit from J. P. Morgan describes what an issuer does:
Anatomy of a MLCD
The example on page 4 illustrates a point to point MLCD linked to an equity index. As illustrated in figure 1, when creating a MLCD the issuer first uses a portion of the available assets to structure a zero coupon bond that matches the maturity date and principal amount of the MLCD. Unlike regular bonds, zero coupon bonds are issued at a discount to their face value and do not pay interest. This allows issuers to structure a bond that will return $1,000 at maturity for an upfront investment by the issuer of less than $1,000 today. The difference between the bond’s value at maturity and the amount paid represents the bond’s implied return.
Zero coupon bonds are issued at a discount to their face value. The discount provides MLCD issuers excess capital to invest. In this example, issuers will use this money to structure call options on a broad based equity index, such as the S&P 500 Index. A call option gives an investor the right (but not the obligation) to buy an investment in the index at a specific price within a predetermined period of time. The call options typically have an expiration date that matches the maturity date of the zero coupon bond, along with a “strike price,” or entry point, that matches the current value of the index. If the underlying asset (the S&P 500 Index) increases in value, the value of the call option will also increase.
…
Alternatively, issuer can buy a put to protect the downside, invest the money in the stock market, collect the dividends and also naturally protected from the upside it promises the investor. On top if the stock market is up on a tear, the issuer reaps the benefits too as the return to the investor is capped.
But if treasury can readily deploy the principal raised, then yeah the call option strategy is what a dealer uses.
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