Opinion ID: 613690
Heading Depth: 4
Heading Rank: 1

Heading: Step One: Purchase of the Securities; Margin Loan

Text: On October 17, 2001, Taxpayers purchased a $1.7 billion principal strip [5] (the Securities) issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) from Refco Securities LLC (Refco), a securities broker. By purchasing a strip, Taxpayers were purchasing the right to receive the principal on a Freddie Mac bond at the date of maturity but not the right to receive interest payments on that bond prior to maturity. The Securities had a maturity date of February 18, 2003, on which date their holder had the right to receive $1.7 billion. Taxpayers purchased the Securities for $1.643 billion, which meant that cashing in the Securities for their par value on the maturity date would provide them with an annual yield of 2.5810% on the purchase price. Taxpayers funded the purchase of the Securities with a margin loan (the Margin Loan) from Refco. The interest rate of the Margin Loan was set at the variable London Interbank Offering Rate (LIBOR) plus 10 basis points. [6] The Margin Loan was secured by the Securities, and Taxpayers also deposited $21,250,000 with Refco as a condition of obtaining the Margin Loan.