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Bonds vs. GICs - Which should you Invest in?

Written by Jessica Steer
Reviewed by Tyler Thielmann
If you’re in the market for low-risk investments, two of the main options investors look at are bonds and GICs. However, which one you decide to invest in will depend on your portfolio and what kind of return you’re looking for on your investment. Both of these types of investments are great for those with low-risk tolerance, though.
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    If we base the investment decision on risk factors alone, GICs are less risky. This is because your initial deposit is guaranteed, and as long as you keep your GIC until maturity, your GIC rate is guaranteed. With bonds, your return is also guaranteed unless the borrower goes bankrupt. This puts a little more risk on bonds,

    Definition of GICs

    GICs, also known as Guaranteed Investment Certificates, are Canadian investments that allow you to invest funds with a guaranteed rate of return while also guaranteeing your principal investment. So, as long as you allow your GIC to come to maturity, you’ll receive your principal as well as all accumulated interest. Trusts and banks distribute these types of investments, each offering its own competitive rate. 

    No matter where you choose to invest in a GIC, they’re all principal protected. Your funds in eligible GICs are also protected by the CDIC, Canada Deposit Insurance Corporation, for up to $100,000 for each CDIC member for each CDIC category. That said, though, the minimum and maximum amounts that you’re allowed to invest in GICs are specific to financial institutions as well as major banks. This also affects your terms, annual interest rates and the types of GICs available since each financial institution will offer its own. 

    How Bonds Work

    While stocks and bonds are often linked together, bonds are very different. Instead of buying shares of a company like you would with stocks, you’re lending money to a company or government. This means that your yield isn’t dependent on how much the company earns or on traditional market conditions. The funds you lend the company with interest are guaranteed, barring that the company goes under. 

    Just like with GICs, you get the most out of bonds if you hold them until maturity. That said, you don’t have to wait until the bond matures to receive funds. You will continue to receive funds through the term of the bond, but when you receive funds, it depends on the bond. In most cases, it’s twice per year. 

    When it comes to purchasing bonds, though, it’s important to understand that there are many different kinds that bond investors can choose from in the bond market, and some of these are more secure than others. These different types are:

    • Government of Canada Bonds
    • Municipal Bonds
    • High Yield Bonds/Junk Bonds
    • Canadian Investment Grade Bonds
    • Investment Grade Corporate Bonds
    • Strip Coupons
    • Residual Bonds
    • Provincial Bonds
    • Discount Bonds

    On top of these different types of bonds, there are also bond funds. Bond funds are similar to mutual funds, where investors pool their money together. With bond funds, an investment professional (financial advisor) invests the money where they believe is the best choice. 

    Advantages and Disadvantages of GICs

    Before you decide if GICs are a good fit for you, it’s important to understand both the advantages and disadvantages of this kind of investment. Let’s take a look at both. 


    Investors like GICs because they offer a greater rate of return than just your traditional savings account. They also have higher interest rates and are less volatile than traditional investments. With GICs, you know the exact terms of your investments and what your GIC yields are going to be since they have fixed interest rates. GIC investors also have the flexibility of choosing their investment terms and the type of GIC they wish to invest in. With GICs, losing money is less likely to happen than other investment options. 


    While GICs are generally a good investment that doesn’t pose a lot of risk, they do come with a disadvantage. GICs have much lower returns than other types of investments. Oftentimes, the returns on GICs are even lower than inflation. This is capital erosion. How it works is you get your interest rate when you sign your term for your GIC. Even if iGIC rates increase during that time, your GIC won’t, meaning that you won’t even earn the rate of inflation. 

    Advantages and Disadvantages of Bonds

    Bonds are different than other types of investments you can purchase through the markets. Their return is based on a predetermined interest rate, not the company's worth or revenue. This means that they come with their own set of advantages and disadvantages. 


    Bonds are much less risky than other investments. Depending on the type of bond you choose to invest in, they can be a stable source of income. You’ll receive periodic interest payments, usually twice per year. 

    They have low volatility high liquidity, and they offer a variety of different terms. They are a great way to offer some stability to your income and diversify your investment portfolio with low risk while still receiving attractive yields. Many investors recommend a 30% bond allocation for good diversification. 

    When it comes to choosing the type of bond to invest in, government bonds are one of the best choices when it comes to Canadian bonds. Some say they’re even better to invest in than banks. They’re also very easy to buy and sell. That said, the market value of these bonds depends on how attractive they are to potential investors.  


    Just like with any type of investment, there are always disadvantages to consider. The largest disadvantage is the rate of return. While bonds are low risk and are guaranteed, the return is lower since there isn’t much risk involved. However, when purchasing a bond, you are subject to default risks. This is when the bond issuer is unable to make their interest payments, also referred to as coupon payments, or repay the bond in full. 

    Another disadvantage to bonds is their inverse relationship with interest rates. With bonds, as interest rates rise, bond prices go down. This means that the coupon rates reduce, even on newer bonds. Since higher coupon rates are what investors are looking for, it can make older bonds more difficult to sell since there aren’t as many buyers. While bonds are low risk, it’s always possible to get negative returns, unlike with GICs. 

    Bonds and GICs: Which is Better?

    When it comes to deciding between bonds and GICs, bonds often tend to be the winner for a few reasons. The first is the tax efficiency. When bonds generate returns, since they’re considered investment income, it can be done so through capital gains, allowing you to keep more of your bond returns. The tax rate on capital gains is much lower than the tax rate on interest earned from GICs. This is because interest income is taxed as regular income using your marginal tax rate, and most GICs are held in non-registered accounts. 

    Another reason that bonds are favoured is that investors can redeem bonds at any time without incurring a penalty. That said, though, according to the pull-to-par effect, you won’t receive the bond's full face value until it reaches the date of maturity. With GICs, ending the term early for most types of GICs will incur a penalty. This means that your return on your GICs can be significantly impacted if you need to withdraw funds early. 

    However, for those looking to build up some savings, then GICs can be a very good idea. You can invest in short one-year terms, and they have higher interest rates than traditional savings accounts. When the term is up, you can either reinvest it or move the funds. That said, though, with either bonds or GIC, there is always a potential reinvestment risk. This means that once you reinvest the funds, you won’t get as high of a return as you did before. 

    Treasury Bills Vs GICs

    While GICs and treasury bills are similar, GICs actually have a higher return than T-bills. That said, what exactly are treasury bills? Well, they’re debt securities issued by the federal and provincial governments. Essentially, they’re a form of bond issued by governments.

    Treasury bills differ a lot from GICs. With GICs, you can put any denomination you choose in as long as you meet the minimum requirements. T-bills are different. With T-bill, you can only purchase in denominations of:

    • $1,000
    • $5,000
    • $10,000
    • $25,000
    • $50,000
    • $100,000
    • $1,000,000

    This makes them less flexible than GICs. Plus, you can only purchase T-bills twice per week. However, they do have much shorter terms than GICs. They range anywhere from a month to a year. They’re also commonly purchased by investors who have a capital preservation strategy, just one of many investment strategies. Capital preservation strategists want to preserve as much of their investment as possible. 

    How you earn a profit with T-bills is also different from that of GICs. With GICs, you earn your profit based on the interest rate you agree to when you commit to your term. Once your GIC hits maturity, you’ll receive the full amount. With T-bills, the amount you earn is based on what you purchase your T-bill for. 

    The income earned from T-bills is earned when you sell your T-bill back. T-bills don’t earn interest, though; they’re sold for under their worth. For example, you wouldn’t purchase $1,000 for $1,000; you would purchase it for less. Once you sell it back for $1,000, the difference is your income. This type of earning is called capital appreciation. Depending on your interest rate, though, you could earn more than T-bills with a GIC. However, both T-bill and GIC income are considered interest income, so they’re both taxed the same. 

    Buying Bonds in Canada in 2024

    Just like with any investment, it’s always difficult to predict the future. That said, many experts believe that 2024 is going to be a good year for bond yields. This has a lot to do with the talk of decreasing the central bank's interest rates since rate hikes have stopped for the time being. This is because bond prices tend to rise when interest rates decline. Bond prices fall when interest rates rise, which has been the case for the last few years. We will see what happens when bonds are predicted to be out of a rising interest rate environment.

    That said, bonds are low-risk securities that are often referred to as fixed-income investments. They provide stability and help to regulate a diversified portfolio. While rates will fluctuate, just like anything else, you’ll be able to keep your initial investment, so they’re always a good idea if you’re looking to invest strategically. 

    GICs and Recession

    When it comes to recessions, also referred to as the global financial crisis, your funds are safe in a GIC. You don’t have to worry about losing money or cashing them out quickly. With GICs, you’re locked in at the interest rate specified when you deposit your money. While this can be a downside when interest rates increase, in the case of a recession, it’s beneficial. Your money is protected. 

    Why is it a Good Time to Move out of GICs?

    When it comes to investing, GICs aren’t the best choice for a high return. Historical data shows that in the last 20 years, interest rates on GICs have barely paced with inflation, making other low-risk investments, like bonds, more profitable. From an investment perspective, many are choosing to invest in other low-risk options. 

    That said, though, GICs are a great tool for savings accounts. If you’re saving for a large purchase, having a protected investment while earning some interest is a great idea. They have higher yields than high-interest savings accounts, and the ability to spend the money is gone since your investment will be locked. 

    Final Thoughts

    When it comes to investing and diversifying your portfolio, both bonds and GICs are great options. They allow you to invest your funds with very little risk and some profit. This helps to offset some of your largest risk investments and can provide a steady stream of fixed income while your other investments earn. That said, they’re also a good option for fixed-income investors. 

    That said, though, GICs and bonds are very different. Bonds have a lower tax risk since they can be considered capital gains, and they have more flexibility than GICs. With GICs, you’re locked in a term and can lose funds if you cash them out, whereas there are no penalties with bonds. Bonds can be riskier, though, unless you choose to go with government bonds. Unless a recession occurs, in a recession, you’re more likely to lose bonds than you are GICs. 

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