Protecting yourself in a repurchase agreement

Article Abstract:

A stock repurchase transaction (also known as a repo) consists of a securities buyer and seller who agree to reverse the sale at a specified date and at an agreed-upon price. Whereas these transactions are accounted for as sales, they function as securities loans. For the investor in such an agreement, the risks relate to the initial seller's inability to buy back the securities at the agreed upon date, and in the event the seller cannot transact the repurchase, the inability of the securities to command a profitable price for the initial buyer. These risks are great enough that most stock repurchase agreements involve high-quality, liquid securities, sold on an "overnight" basis. Securities involved in repurchase agreements should ideally have adequate margins to prevent losses for the original buyer, should the original seller default on his repurchase.

Stock transfer

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New investment on the block: money market preferreds

Article Abstract:

Money market preferred (MMP) securities, also known as short-term auction rate securities or Dutch auction rate securities, offer investors a minimum of market risk and, as with other equity investments, 85 percent of the dividends are excluded from federal income taxes. The yield MMPs receive is determined every seven weeks by a Dutch auction. Steps in investing in MMPs include deciding what portion of the company's funds can be tied up for seven weeks, surveying the returns available from conventional cash management vehicles, and analyzing upcoming MMP issues to determine which ones meet company credit requirements. To participate in an auction, a corporate investor must file a purchaser's letter with the auction agent. To protect issuers and investors, most MMPs have a fixed range of yields. The first MMP securities appeared in 1984.

Methods, Management, Financial planning, Cash management, Institutional investments, Money market funds

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Using floating rate notes as a money market alternative

Article Abstract:

Floating rate notes (FRNs) are bonds that pay interest based upon current interest rates. FRNs fluctuate in value gradually and are, therefore, attractive to corporate cash managers who must preserve the value of their principal. Potential FRN investments should be evaluated based upon: (1) the index to which the note is pegged, (2) the spread between the index and the note in terms of yield, (3) the frequency with which yield rates are subject to change, (4) the credit rating of the note-issuing organization, (5) the scheduled interest payments on the note, (6) the note's minimum or maximum yields, (7) the call and put provisions attached to the note, and (8) the conversion features, if any, offered by the note. Each of these eight investment considerations related to FRN investments is discussed in detail.

Security and commodity exchanges, Risk (Economics), Return on investment, Rate of return, Floating rate notes, Variable rate loans

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