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Repurchase Agreement: Purpose

Repurchase agreements are short-term loans where one party sells securities like Treasury bills to another party and agrees to repurchase them at a future date at a higher price. This allows large institutions and businesses to access temporary funding and the Federal Reserve uses repos to control the money supply. The repo acts as collateralized lending, with legal ownership of the securities passing to the buyer until completion of the contract. Commonly used collateral includes Treasury securities, agency securities, and corporate bonds, with the collateral value exceeding the loan amount.

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189 views1 page

Repurchase Agreement: Purpose

Repurchase agreements are short-term loans where one party sells securities like Treasury bills to another party and agrees to repurchase them at a future date at a higher price. This allows large institutions and businesses to access temporary funding and the Federal Reserve uses repos to control the money supply. The repo acts as collateralized lending, with legal ownership of the securities passing to the buyer until completion of the contract. Commonly used collateral includes Treasury securities, agency securities, and corporate bonds, with the collateral value exceeding the loan amount.

Uploaded by

Saba Baig
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Repurchase Agreement

A repurchase agreement is a short-term loan where both parties agree to the sale and future
repurchase of assets within a specified contract period. The seller sells a Treasury bill or other
government security with a promise to buy it back at a specific date and at a price that
includes an interest payment.

Purpose

The repurchase agreement is tool used by many large financial institutions, banks, and some
businesses. This short-term agreements provide temporary lending opportunities that help to
fund ongoing operations. The Federal Reserve also uses the repo as a method to control the
money supply.

Securing the Repo

The repo is a form of collateralized lending. A basket of securities acts as the underlying
collateral for the loan. Legal title to the securities passes from the seller to the buyer and
returns to the original owner at the completion of the contract.

The collateral most commonly used in this market consists of U.S. Treasury securities.
However, any government bonds, agency securities, mortgage-backed securities, corporate
bonds, or even equities may be used in a repurchase agreement.

The value of the collateral is generally greater than the purchase price of the securities. The
buyer agrees not to sell the collateral unless the seller defaults on their part of the agreement.
At the contract specified date, the seller must repurchase the securities including the agreed-
upon interest or repo rate.

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