GIC vs bonds: Which is better?

GICs and bonds are both fixed-income investments with plenty of similarities — and some key differences. Both typically involve investing your money for a fixed period of time and earning a fixed interest rate, but they deliver different returns and offer different levels of risk. In this guide, we offer a GIC vs bonds comparison to help you decide whether you should invest in GICs, bonds or both.

What are GICs?

GICs (guaranteed investment certificates) typically provide a guaranteed return over a fixed period of time. You deposit money with a financial institution for a set period, and in return you earn a guaranteed rate of interest. You’ll need to wait until the term ends before accessing your money — if you want early access to your money, you’ll need to pay a penalty.

The main benefit of GICs is that they provide a low-risk way to grow your money. Deposits of up to $100,000 are insured by the CDIC, and you have the peace of mind of knowing that you’ll get your principal back plus a certain amount of interest.

It’s worth pointing out that cashable and redeemable GICs allow you to cash in your GIC before the end of the term. The downside? They offer lower interest rates than traditional GICs.

Dive deeper: Full guide to GICs

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Lock in a 4% interest rate on a 1 year GIC. To fund your high interest GIC, you’ll need to open an EQ Bank Savings Plus Account first.

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What are bonds?

Bonds are loans that you, the investor, provide to governments and companies for a fixed period of time. These governments and companies are known as bond issuers, and in return for the money you loan them, they’ll pay you interest. Interest is usually paid at a fixed rate, but variable-rate bonds are also available. And when the bond reaches maturity, you get your principal back.

Once you invest in a bond, its value will fluctuate based on interest rate movements. Falling interest rates cause bond prices to go increase, while the opposite occurs when rates rise.
Just like GICs, bonds are seen as a low-risk option compared to other investments such as stocks. Corporate bonds generally come with a higher level of risk than government bonds, but they also tend to have higher interest rates.

Dive deeper: Full guide to bonds

GIC vs bonds: Which offers better returns?

There’s no clear winner when trying to determine whether GICs or bonds offer better returns. Compare GICs and you’ll find that interest rates vary substantially based on the GIC issuer and the length of the term. Rates also differ depending on whether you opt for a conventional GIC or a redeemable or cashable GIC, or whether you choose a market-linked GIC with a variable rate.

Bonds are a bit different in that they’re more liquid than GICs, while interest rates vary based on whether the bond is corporate, municipal, provincial or federal. If you want to sell bonds before your term is up, their value is linked to what interest rates are doing (which makes them more volatile). They also aren’t insured, which increases the risk because they depend on the ability of the issuer to repay the bond at maturity.

And unlike a GIC, if you decide to sell a bond before your term is up, you risk getting less than you paid for the bond if interest rates are high.

GIC vs bonds: Which is more flexible?

You’ll typically get more flexibility in your investment with a bond because it can be cashed in or traded at any time. That being said, the value of the bonds when you sell them is subject to what interest rates are doing. If they’re high, the value of your bond will be lower and you could lose money.

GICs are usually less flexible than bonds if they’re non-redeemable. For most GICs, you’ll be charged a penalty for early redemption and you might lose any interest you earned on your investment. Cashable and redeemable GICs, on the other hand, will let you take your money out at any time without a fee — but they have lower interest rates.

Pros and cons of GICs

Pros and cons of bonds

You will typically have more security and less risk with a government bond. Corporate bonds can be more risky to invest in, especially when they don’t have a AAA credit rating.

Bottom line

GICs provide a low-risk investment option, guaranteed returns and the peace of mind of insurance coverage. Bonds are also a relatively low-risk choice, providing more liquidity but without the benefit of insurance coverage.

So, should you invest in bonds or GICs? As is often the case when choosing investments, it’s not necessarily a matter of choosing one or the other. GICs and bonds can both be an important part of a diversified portfolio, so compare a range of investments before deciding which ones are right for you.

Frequently asked questions: GIC vs bonds

• What makes bonds more risky than GICs?

  There are three key things that can potentially make bonds more risky than GICs.

  • No insurance. Bonds aren't protected by CDIC insurance in the same way that GICs are.
  • Credit risk. If a bond issuer runs into financial problems, it may be unable to pay out interest or return the value of your bond to you when it matures.
  • Lower selling price. If you sell your bond before maturity, you might get a lower return on principal since the value of the bond will decline if interest rates rise.

• Can I make more money on my bond if I sell it when interest rates go down?

  Yes. You may be able to sell your bond for more than you paid for it if interest rates fall and the price of your bond increases, provided there's interest from other investors.

• Can I invest in a GIC or a bond online?

  Yes, you can invest online through a financial institution or brokerage.