Pension transactions are generally considered safe investments, as the security in question serves as collateral, which is why most agreements involve U.S. Treasury bonds. Considered an instrument of the money market, a pension purchase contract is indeed a short-term loan, guaranteed by security and an interest rate. The buyer acts as a short-term lender, the seller as a short-term borrower. The securities sold are the guarantees. This will help achieve the objectives of both parties, namely the guarantee of financing and liquidity. A repo can be either overnight or a repo at term. A night deposit is an agreement in which the term of the loan is one day. On the other hand, long-term repurchase contracts can be up to one year, most of which are for less than or equal to three months.
However, it is not uncommon for conceptual programs to last up to two years. If the purpose of the repoe is to borrow money, it is not technically a loan: the ownership of the securities in question actually comes and goes between the parties involved. Nevertheless, these are very short-term transactions with a guarantee of redemption. Once the actual interest rate is calculated, a comparison between the interest rate and other types of financing will show whether the pension contract is a good deal or not. In general, pension transactions offer better terms than money market cash loan agreements as a secure form of lending. From a renu possibly`s point of view, the agreement can also generate additional revenue from excess cash reserves. An open buyback contract (also called on demand) works in the same way as a “term repo” except that the trader and counterparty accept the transaction without setting the due date. On the contrary, trade can be terminated by both parties by notifying the other party before an agreed daily period.
If an open deposit is not completed, it is automatically crushed every day. Interest is paid monthly and the interest rate is reassessed by mutual agreement at regular intervals. The interest rate on an open pension is generally close to the federal rate.