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), provides investors with a typically low-risk means of achieving a guaranteed principal repayment, plus interest. These contracts are often 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 appeals to investors as a replacement for a savings account or U.S. Treasury securities. GICs are also known as funding agreements. In a GIC, the insurance company accepts the money and agrees to return it, along with interest, at an agreed-upon date in the future, typically ranging between one and 15 years.

A Bullet GIC differs in that the payment received is in a lump sum rather than as a stream of cash flows. The interest can be paid at regular intervals or held to the contract's maturity. Bullet GICs are typically designed to accept a single deposit, usually $100,000 or more, for a particular time period, generally between three and seven years.

Bullet GICs are often used to fund defined-benefit retirement plans because they are compatible with the timing of plan contributions. A bullet guaranteed investment contract acts much like a zero-coupon bond for accounting purposes, though bonds are typically issued by companies to fund operations, while guaranteed investment contracts are issued by insurance companies to fund their obligations.

Municipal Guaranteed Investment Contracts

Next to 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, interest earned on such contracts is not usually taxed by the federal government. This makes municipal guaranteed investment contracts popular with investors looking to lower their tax bills, but also makes these investments susceptible to being involved with so-called yield burning schemes, which defraud the federal government of its rightful tax proceeds. Yield burning occurs when securities firms sell bonds or guaranteed investment contracts at inflated prices so that the yield on those bonds, and taxes owed on proceeds, appear lower.

Guaranteed Investment Contracts Purchased at Fair Value

The IRS has therefore issued guidelines for investors to rely on to make sure they have bought their guaranteed investment contracts at fair value. Regulation Section 1.148-6(c) dictates that guaranteed investment contracts must be purchased at fair value if the proceeds are to be earned tax free. Investors in municipal guaranteed investment contracts, therefore, should keep careful records of the bidding process to prove they have bought the instruments at fair value. Such careful records include the bid sheet and any material terms of the purchase agreement.