Tandia Financial Credit Union | GIC discussions | Discussion forum

Tandia still has this rate, registered and unregistered, until April 30 I’ve been told:

Non-Redeemable Long Term Deposits

5 YEAR TERM DEPOSIT 3.75%

Tandia has what looks to me like an unusual market-linked GiC.
The unusual part is that the participation rate is 125%.
It's pegged to the S&P/TSE 60.
I've never seen a participation rate over 100% before, and I normally avoid these kinds of things because they are not good deals.

Other than that, the website is sparse on details.

Has anyone ever looked into this?

It can be found at the bottom of the Rates page,
https://www.tandia.com/Personal/Rates/TermDeposits/

Think of participation as a multiplier effect, 100% = 1X index return, etc

Participation can be any multiplier, does not have to less than 1, some notes can be as high as 2-3X but more catered to instituion investor.

How banks able to offer >1X AND prinicipal protection ? Very simple actually.
When you buy an index ETF, you rec the div each year (~3% on sptsx60 currently).
When you buy an index linked note, you dont...

Are they bad investment, not necessarily. The principal protection is a powerful incentive to some. However be prepard to earn 0% when the note matures, and 0 return is a pretty shitty return compare to say a 3.75% 5y GIC which earns you ~19% over 5 years, also principal protected plus risk free.

a note can be structured to give u 5% total return over 5 years as a min guarantee, but then cap the max return one may receive (eg 15% cap). 5% total return is not as good as the 3.75% a straight forward 5y GIC pays, but better than zero. So really no hard and fast rule. In general dealer ‘design’ it based on the features they believe will be most appealing to the target investors.

As you notice, the min guarantee will never be equal to the GIC return for the obvious reason.

Bank offer these products as part of their funding requirement. So cost of funding dictates the note’s feature, including how big a carrot they dangle in front of you.

Credit union are now more active in issuing these notes, while big banks have done it for years. Most likely big banks price it for the CU based on their funding target, among other considerations.

Loonie said
I suppose it still depends on how they set their minimum and maximum returns - which are probably fairly standard.
The participation rate just relates to the possibility of getting to the mmax.  

CU's notes will generally have a better (min and max) as their funding costs are higher than banks, so their notes will be more juicy (better terms to attract) to investors.

Paticipation is a leverage effect. One note can offer zero min and 2X participation, vs another note that guarantees 1% min and 1X leverage. The "cost" to the issue can be the same, its all in the pricing model how much the implied put and call costs, etc.

Possibility of getting to the max is more hinges on how market return is on the "return set date" of the note, the index level they use to calculate the final return.

Was in the capital market for banks so know how the pricing and risk of these type of products very well. Personally I wont invest in it as I can replicate the risk and return profile and saves myself x%+ in fees and commission. For others, it can be a tool to gain exposure to stock market with downside protection.

Loonie said
So, knowing what you know, you don't find the 125% participation rate makes any significant difference?

(I don't understand what you are saying about notes, leverage, and multipliers and so on as the language is technical and is not what is told to the customer.)

I don't understand why cost would be higher to CUs than to banks. I find banks riskier than CUs.  

Without knowing the full details on the nature of the note, I cant say what circumstances make them to offer the 125% return. Most notes will give you less than 100% esp those that also guarantees 100% principal and have a token min return. I have seen notes as high 200% return, partial principal protection, and other non-standard feature. It is structured products so its really up to the trader/product manager imagination how they want to structure it to make it appealing to investors and profitable at the same time obviously

Leverage: Say you want to invest $1000 in the notes but instead buy $1000 in the index, ur return will be 1x the index return (no leverage). If you buy this note, you have a 1.25x leverage (meaning it behave as if you invest $1250 instead of $1000 and earn whatever market return it ends up)

Funding cost is higher for CU than banks. Thats simply the reason why CU are offering most higher savings account rates than the big banks. Funding cost + market condition dictates how juicy a note can be / need to be.

"new deposits only"