Bank of montreal has launched a new family of guaranteed investment certificates products that it says allows investors to mimic the investment strategy of “laddering” GICs and to set their own maturity date.
“Our research has shown that it’s laddered GICs that give you the least interest-rate volatility,” says Julie Sheen, vice president of BMO Term Investments.
Traditionally, an investor creates a GIC ladder by purchasing a five-year GIC each year for five years; as each GIC matures, it is rolled into another five-year term. This staggers maturity dates, and reduces interest-rate risk. The BMO RateOptimizer GIC offers investors the current five-year interest rate on the funds invested in the GIC. On the one-year anniversary of the initial purchase, the investment is automatically renewed and 20% of the investment’s rate is updated by factoring in the current five-year rate, and arriving at a blended rate for the entire investment. At the next anniversary date, the process is repeated.
In a BMO example, an investor opens a RateOptimizer GIC with a five-year rate of 3.5%. If, on the following anniversary date, the five-year rate has increased to 4%, that rate would be applied to 20% of the investment to arrive at the new blended rate of 3.6%. If, at the second anniversary date, the five-year rate has increased to 4.5%, that rate would be applied, resulting in a new blended rate of 3.8%. If the five-year rate should fall, the opposite effect would occur, with the blended rate pulled downward.
The process of “blending and extending” goes on in perpetuity until an investor decides to lock-in the rate. The maturity date is then established as five years from the previous anniversary date, in effect turning the investment into a traditional five-year GIC.
At any time during an anniversary year, an investor has one-time access to a maximum of 25% of the outstanding GIC balance. IE
A better way to ladder?
- By: Rudy Mezzetta
- January 4, 2006 October 30, 2019
- 10:58