- WINSTON SILL/FREELANCE PHOTOGRAPHER
Debra Lopez,vice-president, National Commercial Bank's Capital Markets (NCBCM), fields a question during her presentation at NCBCM's wealth management seminar last Thursday at the Mona Vistors' Lodge, UWI.
On Thursday, NCB Capital Markets (NCBCM) - the oldest and largest brokerage house in Jamaica - held one of its wealth management seminars at the Mona Visitors' Lodge at the University of the West Indies, Mona. One of the topics discussed was repurchase agreements (Repos). NCBCM expands on the topic for readers of Sunday Business:
FOR MANY persons, the choice of investments can be daunting. However, the right investment choice really depends on your financial objectives. A repurchase agreement (Repo) is one financial product that can meet several of your needs.
To refresh your memory, a repurchase agreement or a Repo is a short-term collateralised loan. Essentially, an investor uses cash to purchase a security from an investment house. The security is sold with the seller (the investment company) agreeing to repurchase the security at a specified date and price.
COLLATERALISED LOAN
Hence the Repo becomes a collateralised loan, with the security being the collateral. The difference between the sale price and the repurchase price is the investor's return.
A Repo is a good alternative based on various financial objectives.
You may have a short-term goal that requires that you have ready access to cash. Perhaps you are actively looking to purchase a home and need to have the down payment on hand. Placing these funds on a fixed term instrument such as a Repo allows your money to continue working for you while you search. Even if you aggressively pursue the stock market, you still need to keep a portion of your portfolio fairly liquid. When you invest in a Repo for 30, 60, 90, 180 or 365 days, you know when to expect repayment and how much to expect so you can therefore plan for these funds.
THE NEED FOR SAFETY
Repos are considered a safe investment because they are usually backed by Government of Jamaica securities and premium (blue-chip) corporate paper. This gives the assurance that your principal invested will be returned with interest added at the maturity date. However, in return for the safety that Repos offer, the overall return is less than one would earn in other investments such as bonds or the stock market.
THE NEED TO EARN ON YOUR INVESTMENT
Since most Repos are for less than one year (although they can be extended if requested), investors have the opportunity to benefit from the changing interest rate environment and possibly increase in their earnings from interest payments. In addition to earning guaranteed interest and security of principal, you can also benefit from what is termed the roll over.
When you don't need to use your principal or the interest that is earned, you simply roll over the entire amount and have your broker reinvest at the prevailing interest rates.
This gives you the benefit of earning compound interest that is interest paid on interest already earned. However, it is best to check in with your broker at the maturity date. Interest rates may have changed and you may need to adjust your portfolio.
THE NEED FOR CONTROL
And, of course, a Repo gives you complete control over that section of your portfolio. You decide how much and how long the investment stays. Unlike other investments where your greatest benefits accrue over the long term, Repos can be manipulated for short-term gains.
