Understanding the compound and payment frequency of GICs is crucial for investors to maximize their earnings and align them with their financial goals. At Questrade, GICs come with varying compound and payment frequencies, tailored to different investment
strategies.
Annual Compounding
Annual compounding in GICs refers to the process where the interest earned on your initial investment (principal amount) is reinvested each year. This means that each year, you earn interest not only on your initial investment but also on the interest
accumulated from previous years. You earn interest on your interest!
It's a powerful tool for long-term growth, as it allows your investment to grow at an accelerated rate over time.
For instance, if you invest in a GIC with a yearly compound interest rate, the interest is calculated and added to your principal at the end of each year. This compounded amount then serves as the new principal for the following year's interest calculation.
This cycle continues until the GIC matures.
Example: Ted invests $20,000 in a 3-year non-cashable GIC with a rate of 4.2% that compounds annually. After the first year, he earns $840 in interest, then for year 2 he’s now earning 4.2% on $20,840. At the end of year 2,
he earns $875.28 in interest, and for his third and final year, he’s now earning 4.2% on his total principal amount of $21,715.28. At the end of his final year he’ll receive another $912.04 in interest, and the total paid back to his
account at maturity is $22,627.32 for a total gain of $2,627.32 after three years.
Compared to a GIC that pays out interest every year and does not compound, Ted has earned an additional $107.32. With larger or longer-term investments, this can make a big difference in the total amount you earn from a GIC.
Learn more about the magic of compound interest here, and how it can help accelerate your wealth accumulation.
Payment Frequencies: Annual or at Maturity?
GICs through Questrade offer different payment frequencies: annual payments or payments at the end of the GIC term. The choice between these options depends on your need for regular income versus maximizing growth potential.