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Bank Investment Contract (BIC)
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
A Little More on What is a Bank Investment Contract (BIC)
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.
How Bank Investment Contracts Work
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 of Interest 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.
Reference for “Bank Investment Contract”
Academics research on “Bank Investment Contract”
Of Theory and Practice, Frankel, T. (2001). Of Theory and Practice. Chi.-Kent L. Rev., 77, 5.
Gap Openings, Stevens, R. E. (2012). Gap Openings. In Concise Encyclopedia of Investing (pp. 39-43). Routledge.
Compiled by Karl T. Gruben, Everdeen Tree, Linda Will, Susan Yancey, and Jane Holland, Gruben, K. T. Compiled by Karl T. Gruben, Everdeen Tree, Linda Will, Susan Yancey, and Jane Holland.
Contract costs, bank loans, and the cross-monitoring hypothesis, Booth, J. R. (1992). Contract costs, bank loans, and the cross-monitoring hypothesis. Journal of Financial Economics, 31(1), 25-41. I examine whether monitoring-related contract costs are reflected in bank loan spreads and find evidence that cross-monitoring by senior and subordinate claimholders is associated with smaller spreads. I also find that loan spreads reflect financial contract costs of controlling borrower behavior toward the assets being financed. These results support the importance of contract costs in firms’ financing decisions and provide evidence of the importance of monitoring in bank lending arrangements.