Fixed Income Investments - Institutional Investors and Financing Purchases

Institutional investors tend to finance their purchases in two ways instead of purchasing securities outright. They are:

  • Buying on Margin - In this form of financing the buyer borrows funds from a broker/dealer who in turn gets the cash from a bank. The institution is charged an interest rate plus some additional charges for using this method. Regulations T and U, as well as the Securities Act of 1934, limit the degree to which the margin can be extended to the buyer.
  • Repurchase Agreements - These are collateralized loans in which the institution sells a security with the commitment to purchase the same security at a later date. The length of time could be as short as overnight or extend all the way to the maturity of the security. The price that is agreed upon is the repurchase price and the institution is charged a repo rate. The repo rate is an implied interest rate, which is the cost that the institution incurs for funding the position. Its benefit is that it is a very cheap way to finance a position because the repo rate tends to be set around the Federal Funds rate.
Interest Rate Risk


Related Articles
  1. Career Education & Resources

    How Hard are the CFA Exams?

    Learn about the difficulty of the CFA exams with a description of the tests, some statistics on pass rates and suggestions that can help you pass the exams.
  2. Professionals

    Pass Your CFA Exams on the First Try

    Become one of the elite who pass these exams by using these simple study methods.
  3. Financial Advisors

    MBA or CFA: Which Is Better for a Career in Finance?

    Potential financial advisors, analysts or asset managers have many credentials and degrees from which to choose. Here's a look at the CFA vs. the MBA.
  4. Your Practice

    Is it Too Easy to Become an RIA?

    If you want to become an RIA all you have to do is pay a $165 fee to the SEC and pass the Series 65 exam. Is the bar set too low?
  5. Professionals

    How to Prepare for the CFA Exams

    To pass the CFA exam, get organized, develop an effective study program and review.
  6. Professionals

    So, You Want to Earn Your CFA?

    Here are some pros and cons to consider before you take the CFA charter plunge.
  7. Professionals

    How To Land A Finance Job With A Bachelor’s Degree

    Finding that first finance job is not easy, but these five tips can boost your chances even before you graduate.
  8. Professionals

    Finding The Right Accounting Certification

    The right accounting certification can open the doors of opportunity.
  9. Professionals

    What it Takes to be a Financial Analyst

    A financial analyst researches companies and economic conditions to make business, sector and industry recommendations.
  10. Career Education & Resources

    Financial Analyst: Career Path & Qualifications

    Read about what it takes to become a financial analyst in a corporation or securities firm, and learn how far you can rise in the profession.
RELATED TERMS
  1. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
  2. Personal Financial Advisor

    Professionals who help individuals manage their finances by providing ...
  3. CFA Institute

    Formerly known as the Association for Investment Management and ...
  4. Security Analyst

    A financial professional who studies various industries and companies, ...
RELATED FAQS
  1. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    Understand the differences between a Chartered Financial Analyst and a Certified Financial Planner. Learn how each approaches ... Read Answer >>
  2. How do I become a Chartered Financial Analyst (CFA)?

    Understand what it means to hold the Chartered Financial Analyst designation. Learn how a candidate can work to become a ... Read Answer >>
  3. What types of positions might a Chartered Financial Analyst (CFA) hold?

    Understand what types of positions a Chartered Financial Analyst can hold. Learn what is available to those who have only ... Read Answer >>
  4. Who benefits the most from prepaid expenses?

    Learn who benefits most when expenses are prepaid. Individuals and businesses often make payments, such as rent or insurance, ... Read Answer >>
  5. If I am looking to get an Investment Banking job. What education do employers prefer? ...

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Answer >>
  6. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center