A guaranteed investment contract (GIC) is a

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

that guarantees repayment of principal and a

fixed Fixed may refer to: * ''Fixed'' (EP), EP by Nine Inch Nails * ''Fixed'' (film), an upcoming animated film directed by Genndy Tartakovsky * Fixed (typeface), a collection of monospace bitmap fonts that is distributed with the X Window System * Fi ...

floating interest rate A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, Bond (finance), bond, mortgage loan, mortgage, or credit, that does not have a fixed interest, fixed rate of interest ove ...

for a predetermined period of time. Guaranteed investment contracts are typically issued by life insurance companies qualified for favorable tax status under the

Internal Revenue Code The Internal Revenue Code of 1986 (IRC), is the domestic portion of federal statutory tax law in the United States. It is codified in statute as Title 26 of the United States Code. The IRC is organized topically into subtitles and sections, co ...

(for example,

401(k) In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodic employee contributions come directly out of their ...

plans). A GIC is used primarily as a vehicle that yields a higher return than a

savings account A savings account is a bank account at a retail banking, retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options and the inability to be overdrawn. Traditi ...

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

Treasury securities and GICs are often used as investments for stable value funds. GICs are sometimes referred to as funding agreements, although this term is often reserved for contracts sold to non-qualified institutions. Example: Funds obtained through a

municipal bond A municipal bond, commonly known as a muni, is a bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal bonds is often ...

issuance will generally take time to be drawn down. Depositing the bond proceeds in a GIC gives the bond issuer the liquidity of having the funds available while earning a higher rate of return than it would earn in a money market account. GICs are considered safe vehicles since most insurance companies offering them are rated in the AA to AAA range. The term "GIC" is sometimes used in the context of guaranteed investment agreements, or GIAs.

History

As of 1990, a large amount of people's

401k In the United States, a 401(k) plan is an employer-sponsored, defined contribution, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodic employee contributions come d ...

retirement money had been invested into GICs. However, when life insurance companies started failing, people began to lose their faith in GICs as a product. For example, Executive Life Insurance Company had some

junk bond In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit eve ...

problems in 1990, and people started redeeming their GICs. So many people redeemed Executive GICs that it couldn't pay all that it owed. It was 'failed' and seized by the government. Investors who had bought GICs, such as the

Unisys Unisys Corporation is a global technology solutions company founded in 1986 and headquartered in Blue Bell, Pennsylvania. The company provides cloud, AI, digital workplace, logistics, and enterprise computing services. History Founding Unis ...

employee fund, found that their money was frozen. This resulted in a lawsuit against Unisys. In 1995 the New York State Insurance Department enabled the ' monoline' municipal-bond insurance companies to write insurance on GICs. Thus if the GIC issuer failed, the monoline insurer could pay back investors instead. Insured GICs were called "wrapped" GICs. In the late 2000s,

AIG American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of 2023, AIG employed 25,200 people. The company operates through three core ...

, a holding company and not an insurance company, was bailed out by the federal government to the tune of over a hundred billion dollars. The NY Times reported that some of the government money (at least 9 billion dollars) was used to pay out on "Guaranteed Investment Agreement" contracts that AIG had sold to investors. In 2010 many GIC sellers were sued by counties such as Los Angeles and Oakland over alleged price fixing regarding GICs. Many large banks and other companies were named as "co-conspirators".Lawsuit alleges price-fixing scam
2010 Apr 30, Andrew S. Ross, sfgate, accessed 2010 5 1

Notes

{{Reflist Business terms Investment

History

See also

Notes