Bullet GIC
What Is a Bullet GIC?
A Bullet GIC is a type of guaranteed investment contract in which the principal and interest owed is paid in one lump sum. A bullet GIC, or bullet guaranteed investment contract (BGIC), gives investors a normally generally safe means of achieving a guaranteed principal repayment, plus interest. These contracts are frequently offered by insurance companies.
How Bullet GICs Work
A guaranteed investment contract (GIC) is an insurance company provision that guarantees a rate of return in exchange for keeping a deposit for a certain period. A GIC requests to investors as a replacement for a savings account or U.S. Treasury securities. GICs are otherwise called funding agreements. In a GIC, the insurance company acknowledges the money and consents to return it, alongside interest, at a settled upon date from here on out, ordinarily running somewhere in the range of one and 15 years.
A Bullet GIC contrasts in that the payment received is in a lump sum as opposed to as a flood of cash flows. The interest can be paid at standard spans or held to the contract's maturity. Bullet GICs are commonly intended to acknowledge a single deposit, typically $100,000 or more, for a specific time frame period, generally somewhere in the range of three and seven years.
Bullet GICs are in many cases used to fund defined-benefit retirement plans on the grounds that they are viable with the timing of plan contributions. A bullet guaranteed investment contract acts similar as a zero-coupon bond for accounting, however bonds are ordinarily issued by companies to fund operations, while guaranteed investment contracts are issued by insurance companies to fund their obligations.
Municipal Guaranteed Investment Contracts
Close to insurance companies, municipal governments are one more major issuer of guaranteed investment contracts. To support nearby infrastructure projects, and the financial stability of neighborhood governments, interest earned on such contracts isn't normally taxed by the federal government. This makes municipal guaranteed investment contracts well known with investors hoping to bring down their tax bills, yet in addition makes these investments powerless to being engaged with supposed yield consuming schemes, which cheat the federal government of its legitimate tax proceeds. Yield consuming happens when securities firms sell bonds or guaranteed investment contracts at expanded prices with the goal that the yield on those bonds, and taxes owed on proceeds, seem lower.
Guaranteed Investment Contracts Purchased at Fair Value
The IRS has in this manner issued rules for investors to depend on to ensure they have bought their guaranteed investment contracts at fair value. Regulation Section 1.148-6(c) directs that guaranteed investment contracts must be purchased at fair value assuming the proceeds are to be earned tax free. Investors in municipal guaranteed investment contracts, consequently, ought to keep careful records of the bidding system to demonstrate they have bought the instruments at fair value. Such careful records incorporate the bid sheet and any material terms of the purchase agreement.
Features
- A bullet GIC is a guaranteed investment contract that is paid out as a lump sum rather than a series of cash flows, as is run of the mill in a customary GIC.
- Along these lines, a GIC works in much the same way to a zero-coupon bond, however with deferred repayment of principal and interest.
- A GIC gives a guaranteed rate of return over some period of time in exchange for securing the invested amount for a period of several years.
- A bullet GIC is frequently utilized by pensions to fund defined benefits for plan participants.
