Legal Definitions - guaranteed investment contract

A guaranteed investment contract (GIC) is a financial product, typically issued by an insurance company, that provides a contractual guarantee of both the principal amount invested and a specified rate of return over a fixed period. It is designed to offer stability and predictable growth, making it a popular choice for institutional investors, such as pension funds, and sometimes for individuals seeking to protect their capital from market volatility. The key feature of a GIC is the issuer's promise to return the initial investment and pay a predetermined interest rate, regardless of market performance.

• Example 1: Pension Fund Stability

  A large municipal pension fund, responsible for the retirement savings of thousands of city employees, decides to allocate a portion of its assets to a GIC. The fund invests $100 million in a guaranteed investment contract with a major insurance provider, which promises a fixed 3.8% annual return for the next seven years. At the end of the term, the entire $100 million principal will be returned to the pension fund.

  This illustrates a GIC because the pension fund has a contractual agreement that guarantees both its initial investment (principal) and a specific, predictable rate of return (3.8%) over a set period, providing a stable and low-risk component to its overall portfolio.

• Example 2: Corporate Cash Management

  A manufacturing company has a substantial amount of cash reserves that it doesn't immediately need for operations but wants to keep in a secure, interest-bearing account rather than a standard checking account. To maximize safety and earn a modest return, the company's treasury department places $25 million into a guaranteed investment contract for two years, which offers a guaranteed 2.5% interest rate.

  Here, the GIC serves as a secure vehicle for the company's excess cash, demonstrating the guarantee of both the principal and a fixed interest rate. This is crucial for corporate liquidity management where preserving capital and avoiding risk are top priorities.

• Example 3: Individual Retirement Protection

  Maria, who is five years away from retirement, wants to safeguard a portion of her accumulated retirement savings from potential stock market downturns. She transfers $150,000 from a volatile equity fund within her retirement plan into a guaranteed investment contract offered by her plan administrator. This GIC guarantees her principal and a 3.0% annual return for a five-year term.

  This example shows an individual using a GIC to protect their retirement savings. The contract guarantees the initial $150,000 investment and a predictable 3.0% return, aligning with the definition's emphasis on principal and interest guarantees for financial security.