A GIC issued in the United States is different from a Canadian guaranteed investment certificate, which has the same acronym. The Canadian certificate, which is sold by banks, credit unions and trusts, has different attributes. A guaranteed investment contract (GIC) is a provision of the insurance company that guarantees a return in exchange for withholding a down payment for a certain period of time. A GIC appeals to investors as a replacement for a savings account or U.S. Treasury bonds, which are government-backed government bonds. GICs are also known as funding agreements. The GIC can have a hedge of assets from two potential sources. The insurer may use general account assets or a separate account outside of the company`s general funds. The separate account is used exclusively to fund the GIC.

Regardless of the source that provides the coverage of the asset, the insurance company continues to own the invested assets and remains ultimately responsible for covering the investment. Synthetic GICs, as the name suggests, are structured differently. Under a synthetic GIC, a contract issued by an insurance company, bank or other financial institution offers certain guarantees based on an underlying portfolio managed separately from fixed income securities held by the plan. Synthetic GICs are sometimes called “wrappers” or “wrap contracts” because they “wrap” a specific portfolio with contractual benefits. Synthetic GICs can be considered the issuer who sells a put option to the policyholder. For many synthetic GICs, the option premium takes the form of a fee levied on the value of the outstanding order book. For some forms of synthetic GICs, the option premium for the put option is not explicitly stated, but is included in determining the guaranteed return on investment to the policyholder. Synthetic GICs contain an underlying asset, the formula by which interest is calculated, and a nominal amount.

The interaction between the fair value of a portfolio of separate assets and a nominal amount together determines the amount of the settlement(s) due by the issuer, if any, taking into account all contractual conditions. Depending on the specifics of the contract, a synthetic GIC does not require any initial investment or the payment of a risk commission or commission (which covers either the entire contract or usually for an initial phase of the contract). The terms of a synthetic GIC require net settlement because the contract issuer makes a payment to the holder of the net amount due. Before considering the implications derived from a synthetic guaranteed investment contract (GIC), a traditional GIC must be understood. In a traditional GIC, the issuer of the contract takes deposits from a performance plan or other institutional client and purchases investments held in its general account. (Equity investments can also be purchased, although they are less common than fixed income.) The performance plan is a creditor of the issuing entity and therefore presents a credit risk, although GIC issuers generally have a high credit rating. The issuer is contractually obliged to repay the principal amount and the interest guaranteed for the benefit plan. The terms of the plan generally allow the member to withdraw funds from the fund at book value (also known as account or contract value) for certain reasons, such as loans, withdrawals in the event of difficulty, and transfers to other investment options offered by the plan. A defined benefit GIC includes provisions that reflect the member-led payment or transfer provisions of the plan. As a result, there is a risk that interest rates will rise and the price of fixed income investments that support GIC liabilities will decrease, while these investments may need to be sold at a loss to cover withdrawals.

(Traditional GICs are based on FASB Statement No. 97, Accounting and reporting of insurance undertakings for certain long-term contracts and for realized gains and losses on the sale of shareholdings.) An insurer typically markets GICs to institutions that qualify for favorable tax status, such as churches and other religious organizations. These organizations are exempt under Article 501(c)(3) of the Tax Code due to their non-profit and religious nature. Often, the insurer is the company that manages a pension or pension plan and offers these products as a prudent investment option. The synthetic investment contract consists of two components: first, a portfolio of bonds held by the plan or trust (i.e. The underlying investments), and on the other hand, a contract signed by a financial institution (e.B. of an insurance company or bank) and includes the underlying investments to ensure the expected capital preservation and stable return of stable value. Unlike GICs, this type of contract generally does not provide for a fixed interest rate over the term of the contract. Instead, these contracts offer a credited return, called the credit rate, which changes regularly to reflect the continued performance of the underlying investments and smooth bond yields over time. It also ensures that the credit report credited to participants does not fall below zero and provides for transactions by participants at the value of the contract, which is the capital (or capital) invested plus any accumulated income.

(A summary of the products stable in value can be found in the Appendix.) Changes in the credit quality of the bond or a perceived change in the issuer`s ability to pay interest and/or principal on time may cause the bond price to fluctuate upwards or downwards. Although all bonds are subject to quality factors to varying degrees, U.S. Treasuries are generally considered to present the least credit risk because they are supported by the full confidence and solvency of the U.S. government. Bonds issued or guaranteed by other U.S. government agencies are also considered to carry minimal credit risk. Bonds issued by companies such as corporations, municipalities, or other corporations (including credit pools or other receivables) typically carry higher credit risk, but can be considered high-quality (or investment-grade) even if they are not guaranteed by the U.S. government. Bonds that are more speculative and have a lower rating (i.e. lower than BBB-/Baa3, rated by rating agencies) are called high-yield bonds.

These bonds present a higher risk, but may also offer a higher return potential. Investments in stable value portfolios typically focus on larger sectors with limited or no exposure to higher yield, lower-quality bonds. Thus, if you had had a synthetic GIC issued by AIG, your losses would probably have been 0% or 5% at most, since synthetic only ensures the difference in book value and portfolio and funds of generally stable value use 3 or 4 envelopes, the remaining envelopes having progressive provisions to cover an exit from AIG. However, synthetic GICs fully disclose their fees (typically 0.5% to 1%) of the underlying management of fixed income securities and the envelope itself. Steady-value investment options are generally considered one of the most conservative options available in defined contribution plans and are designed to ensure the stability of capital and accrued interest to plan members. Therefore, stable value plays an important role in helping retirement members build and protect their retirement savings. The performance and risk of your stable value investment option is influenced by the investments underlying the contracts and the financial strength of the contract issuers. A review of the types of bonds and their relative weightings can provide insight into the performance of your stable-value option. Typically, the underlying investments wrapped in synthetic investment contracts are conservatively invested in well-diversified, liquid and overall high-quality bond portfolios. The following hypothetical example illustrates concepts related to synthetic GICs. Insurance providers offer GICs that guarantee the owner the repayment of principal as well as a fixed or variable interest rate for a predetermined period of time.

Investment is conservative and conditions are usually short-term. Investors who buy GICs often look for stable and consistent returns with little price volatility or low volatility. A GIC is sold in the United States and its structure is similar to that of a bond. GICs pay a higher interest rate than most savings accounts. However, they are still among the lowest rates available. The lower interest rate is due to the stability of the investment. Less risk means lower returns on interest payments. The terms of the synthetic investment contract determine how market fluctuations for the underlying investments are “smoothed” by the imputation rate over time. The contract performance is recalculated periodically, usually monthly or quarterly. As shown in Figure 3, the market value of the underlying investments and the value of the contract will naturally diverge and converge over time. The order of magnitude may vary during certain periods when interest rates rise or fall rapidly, or depending on the amount of withdrawals and deposits in the contract. It is important to note that although the market value of the underlying investments fluctuates, synthetic investment contracts are designed to protect participants` capital (deposits and profits) and to generate a consistent credited return under normal circumstances.

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