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2008-03-03T04:02:00.000-08:00

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Repurchasing agreements (RPs, or repos)

2007-05-17T09:16:00.000-07:00

While considering an investment, you may meet a name "RP", or "repo", quite often also used as a comparison for a saving account return, or for other fixed income investments. "RP" stands for repurchase agreement, that is a contract where a subject (the seller, cash receiver, or borrower) sell securities for a certain price to another one (the buyer, or cash provider, or lender), and undertake to repurchase those securities at a later date (usually a few months) for an higer price.
Because of this, this contract guarantees a pre-determined income for the buyer, given from the difference between the initial buying price and the (predetermined) re-selling price. This difference is usually expressed as a percentage, and may be called "repo rate".
(A repo is in many ways similar to a secured loan -- that's why sometimes the actors are called "lender" and "borrower")

The fact you know from the start the return of investment can make RP an investment to hold in due consideration, all the more that the return is usually a little higher than the one of the underlying securities involved in the repo. Many banks allow you to invest your money this way, but you should keep in mind a few things:

It's important to know what security underlies the transaction: it's true that that buyng and repurchasing prices are fixed, but there may be differences if the repo employs Gorvernment bonds or stock shares (usually, Italian banks employ Treasury Bonds when offering repo to their customers, anyway).
You have to remember that in a repo you tie up your money until its term: this means that if you need the money for some expense, you may not be able to withdraw it.
The transaction may have some fixed or variable cost, that may render this kind of investment unprofitable, especially for small sums.
Some banks requires a substantial amount of money to accept to agree to a repo (in some cases, the minimum investment is 20,000 Euros).

It's worth noticing that also two banks we've talked about in the past, IWBank (with the locked-up version of IWPower) and Fineco (with "SuperSave") allow you to use repos to invest your money, in this case also small sums (minimum investment starts from 1,000 Euro), and with little or no cost.

Italian translation of this post: I pronti contro termine (PCT)

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Repurchasing agreements (RPs, or repos)