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Hi,

In these times of uncertainty, I was looking for a decent investment that has a guaranteed return. I found a 5-year GIC that has a 5% return, but the issue is that it only pays the return on maturity. Can someone please give me a hint on how I can compare this GIC to a GIC with annual compounded return? i.e. how do I calculate the equivalent of 5% return in 5 years to a 5-year annual compounded return. If the difference is not that significant, I might opt to an 18 months or a 2/3/5-years GIC options that can be redeemed on a yearly basis and pay annual compounded return.

Thanks so much!
 

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The GIC you describe has a compound annual growth rate of 0.98%. It is okay, but you could do better, even sticking to the big banks. For example, TD has a 5 year GIC for 1% and BNS a bit higher.
 

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HISA rates are dropping like flies, e.g. for June
In terms of savings account interest rate changes, it had been a relatively slow drop since the last Bank of Canada policy interest rate cut on March 27. However, since June 1st, 10 out of the 17 financial institutions on our comparison chart have decreased their interest rates, including Hubert Financial and Alterna Bank, who have both dropped their rates twice this month, to rest at 1.80% and 1.69% respectively. Oaken Financial’s savings account interest rate decreased from from 2.00% to 1.65%. Only 6 out of the 17 financial institutions we track now have a savings account interest rate of 2.00% or higher.
There have been additional drops in July
At the top of our savings account comparison chart are Bridgewater Bank, Motive Financial, and EQ Bank, which all have interest rates of at least 2.00%. The only TFSA rate currently above 2.00% is Motive Financial at 2.05%. There have been a few interest rate decreases since last month’s roundup, at MAXA Financial (from 2.00% to 1.80%), motusbank (from 1.65% to 1.40% for regular savings; from 1.75% to 1.60% for its TFSA), Peoples Trust (from 2.00% to 1.80%) and LBC Digital (from 2.05% to 1.65%).
Most likely those at 2% will be dropping soon and perhaps more to come. There is no particular reason for an FI to pay more than 1-1.5% given where mortgages are and what the big banks are paying for deposits with constraints.
 

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Calculation :

5% total return after 5 years
Multiplier = 1 + 5%/100 = 1.05
Number of years = 5
Multiplier return compounded per year = "Multiplier" to the exponent 1/"Number of years" = 1.05^(1/5) [You can use the" y root of x" on the calculator, in that case use 5 instead of 1/5]
20373


Then the rate is the "Multiplier - 1" x 100% = 0.98%




Or you can use this : Financial Calculators

Select that you are search for the rate of return
Input 100$ as the current amount
Input 105$ as the final amount (5% more)
No contribution
During 5 years
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Thanks so much Topo! But would you be able to share how did you calculate the 0.98?
MrBlackhill provided the math which is the basis of the calculation. I use Moneychimp's CAGR calculator (present value=100, future value=105, years=5) for practical applications.

 

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One can also fire up a spreadsheet like Excel or LibreOffice Calc to do these kinds of calculations if you don't have a fancy scientific calculator handy. I like using the spreadsheet instead of web sites or other tools. Plus, as you get good at using the spreadsheet, there are endless useless.

This is the formula you would enter into a cell:
=1.05^(1/5)-1

Look for the little button with a % on it to format this cell as a percent. You'll see the answer: 0.98%
 
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