DEFINITION of 'Funding Agreement'

A low-risk, fixed-income investment. A funding agreement offers a lump sum to the seller while providing the buyer with a fixed rate of return, which is often based on the LIBOR, the most popular benchmark in the world for short-term interest rates. Mutual funds and pension plans often buy funding agreements due to the safety, predictability and flexibility that they offer.

BREAKING DOWN 'Funding Agreement'

Funding agreements don't require registration and often offer a higher rate of return than money market funds. What's more, they are often tied to put options that allow an investor to terminate the contract after a specified period of time. As one might expect, funding agreements are most popular with those wishing to preserve rather than grow their investment capital, which is why they are generally bought by institutional investors.

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