GICs - An Example
Note: The values used in this example are not realistic!
Company ABC sells a $1,000,000 contract with a 20% guaranteed with a one year term.
Company XYZ purchases the contract on July 1, 2011, writing the check to company ABC.
Company ABC invests the $1,000,000. Over the course of the year, ABC makes good investments and by the end of the contract, they have $1,300,000. On July 1, 2012, they write a check to company XYZ for $1,200,000 (the original $1,000,000 plus the 20% guaranteed return). This investment contract earned them $100,000 in profit ($1.3 million earned minus the $1.2 paid to company XYZ).
However if company ABC only earns $1.1 million, they will lose $100,000 because they are contractually obligated to pay $1.2 million to company XYZ.