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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.