We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is a Treasury Lock?

Malcolm Tatum
By
Updated: May 16, 2024
Views: 10,475
References
Share

A treasury lock is type of agreement between the issuer of a security and the investor who buys that security in regard to the rates that will apply to a treasury security. Essentially, the contract will fix or lock the price or the yield that is associated with that security. This approach makes it possible for the investor to enjoy some sort of guaranteed return from the purchase of the asset when the treasury lock has to do with the price. In the event of a lock on the yield, this means that the investor is able to create a hedge situation that can also be used to his or her best advantage.

The structure of a treasury lock calls for one of the two parties in the agreement to pay the difference between the prevailing market rate and the rate that is designated in the terms of the agreement. If the treasury lock is set at 6%, this establishes the benchmark that both parties agree to use as part of the investment agreement. In the event that the market interest rate exceeds that percentage during the life of the agreement, the investor must pay the seller the difference between the lock rate and the market rate. At the same time, if the market interest rate is below the percentage designated as the lock rate, then the seller must pay the difference between the two rates to the buyer or investor.

By establishing a treasury lock, the investor is in a position to project the type of returns he or she will receive, based on what is anticipated to happen with the market interest rate. This strategy calls for considering all relevant events that may occur and cause that rate to shift above or below the treasury lock rate, setting the rate at a level that is likely to require the seller to pay the difference to the investor. Failure to accurately project what will happen with the market interest rate will result in not receiving as much benefit from the arrangement, although the investor still receives a return based on the treasury lock rate itself.

While a treasury lock does carry a relatively low risk for the investor, there is always the chance that the market interest rate will increase over the lock rate, resulting in the need to tender the difference between the two rates to the seller. This is where accurately predicting the movement of the market interest rate is key for the success of the strategy. While it is rare, there is the chance of the market rate increasing enough to offset the lock rate, leaving the investor with no returns in interest, at least until that rate begins to fall once more.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.smartcapitalmind.com/what-is-a-treasury-lock.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.