What is a GIC Bullet?
A GIC Bullet is a type of guaranteed investment contract in which the principal and interest owed are paid in a single sum. A bullet GIC, or bullet-secured investment contract (BGIC), provides investors with a low-risk means of achieving a repayment of the guaranteed principal, plus interest. These contracts are usually offered by insurance companies.
- A GIC bullet is a guaranteed investment contract that is paid as a lump sum rather than a series of cash flows, as is typical in a regular GIC.
- Because of this, a GIC works similar to a zero coupon bond, but with deferred payment of principal and interest.
- A GIC provides a guaranteed rate of return over a period of time in exchange for locking the amount invested for a period of several years.
- Pensions often use a GIC vignette to fund defined benefits for plan participants.
How GIC Bullet Works
A guaranteed investment contract (GIC) is a provision of the insurance company that guarantees a rate of return in exchange for holding a deposit for a specified period. A GIC attracts investors as a replacement for a savings account or US Treasury securities GICs are also known as financing arrangements. In a GIC, the insurance company accepts the money and agrees to pay it back, along with the interest, on an agreed date in the future, usually between one and 15 years.
A GIC Bullet differs in that the payment received is a lump sum rather than a cash flow. Interest can be paid at regular intervals or maintained until the expiration of the contract. GIC Bullets are generally designed to accept a single deposit, usually $ 100,000 or more, over a particular time period, usually between three and seven years.
GIC Bullets are often used to fund defined benefit retirement plans because they are compatible with the timing of plan contributions. A bullet-backed investment contract acts much like a zero coupon bond for accounting purposes, although bonds are typically issued by companies to finance operations, while secured investment contracts are issued by insurance companies to finance their operations. obligations.
Municipal guaranteed investment contracts
Along with insurance companies, municipal governments are another major issuer of guaranteed investment contracts. In order to support local infrastructure projects and the financial stability of local governments, the federal government generally does not tax the interest earned on such contracts. This makes municipal guaranteed investment contracts popular with investors looking to reduce their tax bills, but it also makes these investments susceptible to being involved in so-called yield burn schemes, which defraud the federal government of their income. legitimate prosecutors. Yield burning occurs when securities firms sell bonds or guaranteed investment contracts at inflated prices, so that the yield on those bonds and the taxes owed on earnings appear lower.
Guaranteed investment contracts acquired at fair value
Therefore, the IRS has issued guidelines that investors can rely on to ensure that they have purchased their investment contracts guaranteed at fair value. Section 1.148-6 (c) of the Regulations dictates that guaranteed investment contracts must be purchased at fair value if the income is earned tax-free. Investors in municipal guaranteed investment contracts, therefore, should keep careful records of the bidding process to demonstrate that they have purchased the instruments at fair value. Such careful records include the bid sheet and any material terms of the purchase agreement.