Bank Investment Contract - Explained
What is a Bank Investment Contract?
Written by Jason Gordon
Updated at April 18th, 2022
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What is a Bank Investment Contract?
A Bank Investment Contract is an agreement between a bank and an investor whereby the bank provides a guaranteed rate of return in exchange for keeping a deposit for a fixed period of time. This is usually between 1 to 10years. It is suitable for investors who desire to manage their wealth rather than investing it. However, this contract has an advantage of lower risk involved but lower interest rates
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How Does a Bank Investment Contract Work?
BICs are quite different from certificates of deposits (CDs) and similar to guaranteed investment certificates (GICs). Unlike CD's, BICs allows its investors to increase their investment at any point in time but with a stipulated guaranteed rate. Similar to GIC's, while bank investment is offered by banks, GICs are issued by insurance companies. Here, investors who purchase these contracts are required to leave the money invested in them for the duration of the contract. One of the advantages of holding them is that they are low risk investment but they are illiquid.
BIC can be referred to as a buy-and-hold investment because there is no secondary market for such contracts. This investment is more profitable than a savings account. Just like a savings account, BIC's guaranteed rate of return is higher for deposits that are larger and for a longer period. For example, $100,000 invested for ten years can be expected to have a higher rate than $20,000 which is invested for five years. In documenting BIC, the bank offers the investor a guarantee of a specific rate of return to be earned. Including payments ofInterest and the principal amount invested. All of these are included in the contract. BICs are quite different from CDs but have some specific similarities. These similarities include guarantees and a low-risk profile. They differ in terms that BICs allow for ongoing deposits while CDs require one huge sum of investment to receive a specific rate of return. In cases of emergencies, BICs allow for withdrawals earlier than the stipulated expiry date. However, early termination of agreement incurs costs like administrative and interest rate costs by the bank on the investor. BICs have a deposit window within a few months, this window allows for regular deposits if the need arises. These deposits have the same guaranteed rate. Likewise, BICs generate more than Treasury notes and bonds, this is due to the fact that the U.S. government does not support them.