This text is taken from Courrier de l’économie. Click here to subscribe.
What do you think of the Épargne Placements Québec stock market bonds offered with a maturity of five and ten years? They are on sale by March 15 and one of our readers, Louis Luc, wonders about them.
Épargne Placements Québec talks about an ongoing promotion. The maximum return on the ten-year term, usually set at 100%, is now 400%. That of the five-year term, usually set at 40%, increases to 100%. According to the institution’s calculations, the maximum annualized (compounded) return is 14.87% for the five-year term and 17.46% for the ten-year term.
The big advantage this year is precisely the increase in this limit. For the five-year term, it has evolved in the past from 60% to 40%. For ten-year-olds, it went from unlimited to 100%. Hence the increased interest.
Another advantage. We are talking about a stock market investment, based on the performance of the Quebec 30 Index, that is, the thirty largest companies with their head office in Quebec. We are familiar with stock market volatility, but unlike other index investments, the capital here is guaranteed by the Government of Quebec and fully repayable at maturity. So no risk of capital loss.
Finally, the actual yield to maturity is calculated from the average of three closing values of the IQ-30 during the first three weeks of the term and the average of four closing values during the last four months of the term. There is therefore what is called smoothing, which can be interesting in the event of a market setback at maturity. Let’s take the example of a five-year bond maturing on March 15, 2020 (in the midst of the COVID-related mini-crash). The yield would have gone from double to simple depending on whether the calculation at maturity was based on an average of four closings or on the closing price on March 15.
The past does not guarantee the future. That said, according to calculations by Placements Québec, the historical annualized return of the index is 6.7% over five years and 9.4% over ten years (as of February 7). Of the 83 market bond issues that matured, there was no negative return. Depending on the issue, the annualized return fluctuates between a low of 1.1% and a high of 9.9% for five-year issues, between 4.5% and 12.7% for ten-year issues. Of the sixty maturities in progress, there is only one negative return as of February 1, i.e. the September 2021 issue. The annualized return oscillates between a low of 2.2% and a high of 18.5%.
Need we remind you that we are coming out of a particularly difficult year in 2022 on the stock market and that Quebec large caps generally post a superior performance.
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