All You Should Know About a Repurchase Agreement
The purpose of legal documents and contracts is to support the agreements reached in verbal communication. They are a must in various situations, including the investment field.
We’ll introduce you to the term repurchase agreement and explain its perks and drawbacks. If you are interested in trading in securities, you will find the answers to all your questions here! We will show you how to create legal documents in a snap by using DoNotPay’s customizable contract templates!
What Is a Repurchase Agreement?
A repurchase agreement is a contract that enables financial organizations—banks or dealers—to sell government securities to another company or investor and repurchase them later. The entity that buys the securities uses them as a guarantee or pledge, and it gets an interest from the seller when the transaction is reversed.
This contract is popular in state or local government circles. Such documents act as a great substitute for the government-related investment pools or other money market assets.
What Subtypes of Repurchase Agreements Are There?
Depending on the needs, parties can choose from different repurchase agreement subtypes that have different maturity periods. It’s a period after which the seller will purchase the securities back. The table below shows the most common subtypes:
|Repurchase Agreement Type||Details|
|An overnight repurchase has a short maturity period—it ends the next business day. The interest rate is usually predetermined and unchangeable|
|Using this subtype, the parties determine a specific maturity period that ranges from a few days to a few weeks. In most cases, these are short-term contracts, but the signing entities may prolong them to a few years if the investment propositions allow it. The interest rate is predetermined and unchangeable|
|The signing entities don’t propose a contract end date. The agreement typically keeps renewing every day until one of the parties decides to stop it. The interest rate changes with each passing day|
|This is the most common type of repurchase agreement. A tri-party organization—usually another bank or a clearing institution—acts as an intermediary between the signing entities. Its purpose is to make sure all the transaction requirements are met|
|The contracts belonging to this subtype are usually long-term and are closely related to certain capital programs|
What Are the Benefits and Risks of Repurchase Agreements?
Below is another table showing typical advantages and disadvantages of repurchase agreements:
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