Here are some of the options available when you want
to invest your cash but still keep it liquid.
Bond: A debt security. When you buy a bond,
you are lending money to the corporation, government or entity issuing
the bond. In return for loaning the issuer money, you get a specified
interest rate, which, depending on the type of bond, is paid either
at specific periods during the life of the bond or when the bond
matures. The principal is repaid at maturity.
Canada Savings Bond (CSBs): Fully guaranteed
by the federal government, CSBs are a popular choice for Canadian
bondholders and one of the safest investment choices. They can be
purchased anytime between October 1st and April 1st each year. They
offer maximum flexibility and can be cashed at any time and can
be held inside or outside of your Registered Retirement Savings
Plan (RRSP). You can buy them in CAN$100 denominations and they
come with different maturity dates, depending on the series you
buy. Maturity dates range from one to five years or longer. They
offer a minimum guaranteed rate of interest that either pays out
at regular intervals or compounds over the life of the bond. They
can be purchased at most financial institutions and through some
employers via a monthly savings plan.
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Canada Premium Bonds: Similar to CSBs, Premium
Bonds pay a higher interest rate. However, they can only be redeemed
on the anniversary date or 30 days thereafter, otherwise you pay
a penalty. For more information on federal bonds see Canada Savings
Bonds Web site at http://www.csb.gc.ca.
Real Return Bonds: These are also bonds issued
by the government of Canada, which provide investors with protection
from inflation. The bonds' interest payments are linked to the Consumer
Price Index, a monthly statistic that measures the change in price
of a fixed basket of consumer goods and services. As inflation rises,
so does the interest paid on the bond. So if the bond is held to
maturity, it will pay a better return than inflation. Interest is
paid semiannually. The bonds can be sold at any time, similar to
a stock, with a three-day settlement period. Current maturity dates
are 2021, 2026, and 2031. They are eligible for both Registered
Retirement Savings Plans (RRSPs) and Registered Retirement Income
Funds (RRIFs). They are normally available through a broker and
can be purchased for as little as $1,000.
Treasury Bills: These are short-term investments
that mature within a year and are issued by the federal and some
provincial governments, usually in large denominations. Investment
firms buy them, break them up and then sell them to investors in
smaller amounts. T-bills don't pay interest. Rather, you buy them
at a discount to their face value and cash them out at maturity.
So you might pay CAN$425 for a T-bill that's worth $500 at maturity.
Guaranteed Investment Certificates (GICs):
A GIC is a deposit certificate that a bank or financial institution
issues to investors. They have a range of terms, from as little
as one day to as much as one, three, five, seven or even 10 years.
Your ability to cash them out is restricted depending on the type
of GIC you purchase. The longer the term, the higher the interest
rate. Rates on GICs are usually higher than on a savings account,
but less than other fixed-term investments. The low interest rates
have prompted financial institutions to create a range of new GICs.
Some are linked to stock indexes, providing investors with a potential
higher rate of return. However, those returns are normally capped
at a fixed amount. The Canadian Deposit Insurance Corporation (CDIC)
will cover certain GICs up to CAN$60,000 if held in a member institution,
which includes banks and trust companies. For more information about
what the CDIC insures, check out its Web site at: http://www.cdic.ca.
Strip Bonds/Zero-Coupon Bonds: A federal, provincial,
municipal or corporate bond that is separated into two parts, the
principal and the interest payment. They are then sold to investors,
and terms run from less than one month to as long as 50 years. Strip
bonds are more volatile than other bonds that pay interest. There
is no minimum investment, and the bonds sell in increments of CAN$1.
Money Market Mutual Funds: A mutual fund that
holds a range of secure fixed-income products. Investors buy units
in the fund and are charged a management fee by the fund company
for managing the fund. Investors may also face brokerage commissions.
Laddering: A method of investing in bonds that
compensates for varying interest rates. The investor buys fixed-income
investments with differing expiration dates, say one, two, three,
four and five years. When an investment matures, the money is rolled
into a new bond that will mature at a date later than the last bond
in the ladder. The goal is have bonds come due at regular intervals
and then reinvest that money to spread the risk of interest rate
increases or declines over a portfolio of bonds.
Chequing Account: An account that allows the
depositor to withdraw funds at any time by writing a cheque, a document
that instructs the bank to pay money to the recipient from the writer's
account.
Passbook Savings Account: An interest-bearing
savings account where the investor records transactions in a small
book. Each financial institution sets rules governing such accounts
in terms of fees, options and rates.
Daily Interest Savings Account: Usually a no-frills
account that pays a higher savings rate than other savings accounts,
but often precludes users from writing cheques and requires certain
minimum balances be maintained. Interest is calculated based on
a daily balance and paid monthly.
Jim Middlemiss is a freelance
writer and lawyer based in Toronto. He's a frequent contributor
to National Post, Investment Executive and Wall Street and Technology.
