A Guaranteed Investment Contract is an Insurance contracts that guarantee to the owner, principal repayment and a fixed or floating interest rate for a predetermined period of time. Guaranteed investment contracts are typically issued by insurance companies and marketed to institutions qualified for favorable tax status under federal laws. Primarily used as a vehicle that will yield a higher return than a savings account or treasuries.
Example: Funds obtained through bond issuance will generally take time to draw down. A GIC allows the bond issuer the liquidity of having the funds available while earning a higher rate of return. GIC's are considered safe vehicles since most insurance companies offering the GIC are AA to AAA rated.
If the terms of the final purchase agreement or the guaranteedinvestmentcontract deviates from the bid solicitation form or a submitted bid is modified, the issuer must retain a brief statement explaining the deviation and stating the purpose for the deviation.
For guaranteedinvestmentcontracts, the amount of recoverable fee must be a reasonable amount not to exceed the present value of annual payments equal to 0.05% (5 basis points) of the weighted average amount reasonably expected to be invested each year of the term of the contract using the yield on the investment.
When a guaranteedinvestmentcontract is included as part of a yield restricted escrow (escrow float agreement) together with other open market securities, the $10,000 or 10 basis point limitation will apply to the open market securities while the 5 basis points limitation will apply to the guaranteedinvestmentcontract portion of the escrow.
For guaranteedinvestmentcontracts, the computational base is the aggregate amount reasonably expected as of the issue date to be deposited over the term of the contract.
For example, for a guaranteedinvestmentcontract used to earn a return on what otherwise would be idle cash balances from maturing investments in a yield restricted defeasance escrow, the aggregate amount reasonably expected to be deposited includes all periodic deposits reasonably expected to be made pursuant to the terms of the contract.
Commentators suggested that the computational base for a guaranteedinvestmentcontract should be determined as of the date the contract is acquired, rather than the issue date, so that the safe harbor may be applied to guaranteedinvestmentcontracts that are not anticipated on the issue date.
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