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The Money Management Newsletter: GICs and Fixed Income
Extend and Blend
Its a new retirement investment term, not something you do at the hairstylist!

GIC type term investments are selected by investors seeking security for their money, predictable rates of returns over a specified period; these are the main advantages of a GIC. In return for the security and fixed interest guarantees, however, investors usually give up flexibility and liquidity; these are a GICs limitations.

At Fiscal Agents, we are continually seeking out products and services that can fulfill a special financial need. We have found an unique investment service vehicle offered by Advantage Advisors Trust, utilizing it's parent Bank of Montreal's product.

As we explain the options and features that are unique to this product in the marketplace, you'll be reminded that the money invested in GICs is usually locked in until maturity. This is fine in an environment in which interest rates are stable or falling. But when rates are increasing, investors with long term GICs can be left behind.

EXAMPLE: $100,000 is invested in a 5-year term GIC at 4% - for $4,000 in annual income. A year after investing, interest rates have increased to 6%. The 2% difference would represent a 33% ($1,000) difference in interest income. Most financial institutions pay the same rate regardless of your decision to receive this income annually, semi-annually or monthly.

Because term investments play a very important role in a RRIF portfolio, the traditional rule of "locked in until maturity" moved BMO to believe that allowing their term product to be broken - when it works to the benefit of the client - and offering two unique options that add flexibility and allow investors to unlock their BMO term investments before maturity. Provides a new dynamic to the exclusive products of via financial advisors.

Determining how and when to take advantage of these options, is something your Fiscal Agents advisor can help you with. However, prior to converting your RRSP savings into retirement income producing investments, you'll need to evaluate the roll this product may play, otherwise your opportunity to avail yourself may be delayed until your RRIF investments are closer to a future maturity date.

Knowing your locked-in term RRIF, LIF or LRIF investments are difficult or impossible to re-negotiate or change - means missing out on any future interest rate hikes prior to maturity makes the Blend & Extend Option attractive.

The Blend & Extend Option offers GIC investors the potential for higher returns by making interest rate increases accessible before investments have matured.

Here's how it works. If an investment certificate(s) from BMO Term Investments is at least 30 days or more away from its maturity date(s):

  • Your investment advisor can blend the rate(s) of the existing investment certificate(s) with the prevailing rate.
  • The existing term(s) of the blended investment(s) is then extended for a new specified term at the blended rate calculated.
  • The newly blended investment must mature at least one year following the latest maturity date of the investments being blended.
EXAMPLE: Suppose it's January 17, 2003 and two investments are eligible for the Blend & Extend Option with a 5-year term. Let's suppose that the 5-year posted rate is 4.85% on that date. Here's how the Blend & Extend option would work when blending two investment certificates into one.
# 1 June 16, 2003 $ 40,000 4.15 %
# 2 March 15, 2005 $ 60,000 4.35 %
new January 27, 2008 $100,000 4.701 %

GIC Portfolio Management through Consolidation

If you've favored BMO as an GIC-RIF issuer and have over time, assembled a portfolio containing numerous BMO term certificates, each having a different maturity date and interest rate. Juggling them all may seem cumbersome. However, BMO's consolidation option turns this into one easy-to-manage investment certificate - making a lot of sense if money management is not your forte.

With this option the interest rates and maturity dates of the investment certificates are blended into one investment certificate that harmonizes rates and maturity dates.

As well, the interest rate environment may make it beneficial to reduce the overall term to maturity of your investment certificates. The Consolidate Option can be an ideal solution in this circumstance.

EXAMPLE: Suppose it's January 17, 2003. Here's how the Consolidate Option would work when consolidating two investment certificates into one.
# 1 June 16, 2003 $ 40,000 4.500%
# 2 March 15, 2005 $ 60,000 5.500%
new July 3, 2004 $100,000 5.395%

To summarize, theses product options allows greater flexibility in your GIC portfolio, without risking returns, the overall product can help maximize returns and provide flexibility to managing your GIC portfolio-especially in periods of rising interest rates.

Consolidation: The mix and matching process

If you have a mixture of instrument's from a variety of issues all denominated in smaller amount's, you'll need to be a bit more judicious in managing a consolidation process.

If this is the case, manufacture a maturity calendar (our advisors can help) showing the maturates, the investment values and any Transfer-out fees. Then figure out the time spans between the maturity dates, and if any fees impact the returns excessively.

This information will allow you to combine maturing amounts. Choosing what to invest in throughout this consolidation process is made easier by the numerous investment vehicles in the marketplace that can be used in the consolidation process. E.g. Savings accounts, short term or redeemable deposits. A favorate is the one year cashable products that allow more flexibility and at times a better rate.

Using a "Registered" savings account or short term notes, assemble the amount closet to a convent investment - an investment that can be used a a collection point for future consolidation. It takes a little time and some effort to transfer from one institution to another, planning a course of action while your investments are in the RRSP stage is by far the best place to start.

Consolidating your maturing RRSPs sooner than later, is one of the smartest planning and money management option of term certificates. Its more practical, especially in periods of falling or steady interest rates. As well, the overall term of several investment certificates in a portfolio can be reduced. Speak with your Fiscal Agents investment advisor to determine how this will be beneficial to your fixed term retirement portfolio and how it may help you meet your financial goals.

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© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700


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