For the party who sells the security and agrees to buy it back in the future, it is a repo; For the party at the other end of the transaction, which buys the security and agrees to sell in the future, this is a reverse retirement transaction. The repo rate is the annualized rate of the transaction: Robert Citron was for many years treasurer and tax collector for Orange County, California. When Citron started in 1971 as a tax collector and then as district treasurer, interest rates kept rising, so he only had to buy government bonds to get a high return from the county`s investment pool. But interest rates had peaked in the early 1980s and continued to fall thereafter. Citron predicted that interest rates would fall for a while, so he developed a new investment strategy that took advantage of the interest margin between long-term government bonds and the short-term repo rate. In the early 1990s, this strategy allowed him to achieve high returns for the investment pool, which included about 189 different public institutions in Orange County, including 31 cities, local school districts, and water and sanitation agencies. Based on this success, he was awarded in 1988 by City and State magazine as 1 of the top 5 finance officials. (Lemon also used reverse floaters, where interest payments rise when interest rates fall, and vice versa. However, since this article is about rest, we will focus on how he used these financial instruments to increase returns.) He bought long-term and secured government bonds, then entered into repo contracts with several banks and used long-term government bonds as collateral that had higher interest rates than deposits.
Although long-term government bonds were secured, Orange County continued to benefit from interest on these bonds. This allowed Citron to buy even more long-term bonds to contract more rest, thus increasing its debt level by initially using 7.6 billion $US to buy investments of 20.6 billion $US. A decisive calculation in every repo agreement is the implicit rate. If the interest rate is not favorable, a pension agreement may not be the most effective way to access cash in the short term. A formula for calculating the real interest rate is below: an open repo (also known as an open maturity repo) is a contract that allows the borrower to borrow money up to a certain limit without signing a new contract – much like an open loan agreement. An open repo reduces settlement costs when the repo needs to be overwritten. However, any party has the right to terminate at any time. Open deposits also give the trader the right of substitution allowing the substitution of other securities of similar credit quality for collateral.
The interest rate for open deposits is slightly higher than for overnight-rest. Sometimes the losses can be huge. For example, in 1994, the municipality of Orange County, California, lost $1.5 billion in speculative trades including deposits, and eventually forced it to declare Chapter 9 bankruptcy – the largest municipal bankruptcy of all time. Prices for all municipal bonds have fallen dramatically, as the Orange County fiasco has underscored the fact that municipal bonds may not be as safe as expected. On December 7 of the same year, the state of Texas lost $70 million of its public investment pool, which was speculatively traded in rest and reverse rest. In determining the actual cost and benefits of a repo transaction, a buyer or seller interested in participating in the transaction must consider three different calculations: once the actual rate is calculated, a comparison of the interest rate with that of other types of financing will show whether or not the repo transaction is a good deal. . . .