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Treasury Lock Agreement

The nuances of the pre-delivery phase, such as hiring an agent, analysing the conditions of supply and demand on the market, fixing the prices of the guarantee, compliance with the legislation, etc., may lead to a delay before the bond issue is put on the market. During this period, the issuer may see interest rates rise before the securities are priced, which increases the cost of credit for the issuer in the long term. To guard against this risk, the company buys a cash lock and undertakes to pay in cash the difference between 4% and the cash interest rate in force at the time of invoicing. A cash freeze is a hedging instrument used to manage interest rate risk by effectively guaranteeing current-day interest rates for federal securities to cover future expenditures financed by the debt. While a cash freeze presents a relatively low risk to the investor, it is always possible that the market rate will exceed the blocking interest rate, implying that the difference between the two interest rates must be offered to the seller. Here is the accurate prediction of the movement of the market interest rate the key to the success of the strategy. Although it is rare, it is possible that the market interest rate will rise to the point of offsetting the blocking interest rate, so that the investor has no return, at least until this rate begins to fall again. Between the time an entity makes a financial decision and the time it takes to complete the proposed transaction, there is a risk that the yield on the government bond will have a negative impact on the profitability of the company`s transaction plan. Cash freezes offer the user the advantage of blocking benchmark interest rates related to future debt financing and are often used by companies that plan to issue debt in the future, but want to be sure of what interest rate they will pay for that debt. A cash freeze is a kind of agreement between the issuer of a security and the investor who buys that security with respect to the interest rates applicable to a treasury security. In essence, the contract will set or freeze the price or return associated with that title.

This approach allows the investor to get some kind of guaranteed return from the purchase of the asset if the cash freeze is related to the price.. . .