Canadian Securities Course (CSC) Level 2 Practice Exam

How are Market-Linked Guaranteed Investment Certificates (GICs) different from regular GICs?

1. Linked to specific assets such as mortgages or consumer loans for added security.

2. Divided into classes or tranches with different levels of risk and return.

3. Pay a guaranteed interest rate regardless of the underlying index performance.

4. Linked to an index with a guarantee of principal and some growth potential.

The correct answer is: Linked to an index with a guarantee of principal and some growth potential.

Market-Linked Guaranteed Investment Certificates (GICs) are distinct in that they offer a guarantee of principal along with the possibility for growth, which is tied to the performance of a specified index, such as a stock market index. This structure allows investors to benefit from the potential appreciation of the market while ensuring that their initial investment is safeguarded. By linking the returns to the performance of a market index rather than providing a fixed interest rate, these GICs can offer greater returns in favorable market conditions, albeit with the understanding that the returns may vary and are not as predictable as those from traditional GICs, which provide a set interest rate. This dual feature of principal protection and potential for additional growth is what sets market-linked GICs apart from their traditional counterparts. Other options do not accurately describe this product's nature. Some may imply characteristics unrelated to the underlying structure or function of market-linked GICs, and here, the connection to a market index stands out as the defining trait.