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Investment Agreement

Investment Agreements, also referred to as Guaranteed Investment Contracts, are ideal for the investment of proceeds from tax-exempt and taxable bond issues including construction, debt service reserve and revenue funds. An Investment Agreement pays a fixed rate of interest or a floating rate based on a predetermined index as specified in the bidding documents. The Investment Agreement permits the issuer to withdraw any amount of money, at any time, without any cost or penalty, for any program purpose.

Investment Agreements are contractual obligations issued by banks, insurance companies and other entities. The Investment Agreement Providers are generally rated "A"" and for added safety, the Investment Agreement will often include a "downgrade provision." This will provide that in the event the rating of the Investment Agreement Provider decreases below a certain predetermined threshold, the Investment Agreement Provider will be required to post collateral (U.S. Treasuries and Agencies) or allow all funds to be withdrawn without cost or penalty.

Since funds can be withdrawn without cost or penalty, on an as needed basis, the bond issuer is not exposed to any market risk or interest rate risk. That is, the issuer is not subject to the risk of liquidating securities at a loss in the event that funds are needed sooner than anticipated in a higher interest rate environment. The issuer is also protected from the risk of having to invest at lower interest rates in the event that investments mature before funds are needed. This is a risk that can occur in any interest rate environment since the term of any funds reinvested in this scenario may be quite short.

The advantages of Investment Agreements may be summarized as follows:

  • The Investment Agreement guarantees a fixed yield, or spread versus an index rate, determined in advance.
  • Funds may be withdrawn without cost or penalty for any permitted purpose.
  • The bond issuer has protection in the event that the Investment Agreement provider is downgraded.
  • The Investment Agreement eliminates market risk and reinvestment risk.

Since withdrawals at par are permitted at any time, there is no need to "mark to market" the investment.

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