Banking & Financial Awareness
Repurchase agreement
Form of short-term borrowing
Overview
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of secured short-term borrowing, usually, though not always, using government securities as collateral. A contracting party sells a security to a lender and, by agreement between the two parties, repurchases the security back shortly afterwards, at a slightly higher contracted price. The difference in the prices and the time interval between sale and repurchase creates an effective interest rate on the loan. The mirror transaction, a "reverse repurchase agreement," is a form of secured contracted lending in which a party buys a security along with a concurrent commitment to sell the security back in the future at a specified time and price. Because this form of funding is often used by dealers, the convention is to reference the dealer's position in a transaction with a counterparty. Central banks also use repo and reverse repo transactions to manage banking system reserves. When the Federal Reserve borrows funds to drain reserves, it can do so by selling a government security from its inventory with a commitment to buy it back in the future; it calls the transaction a reverse repo because the dealer counterparty to the Fed is lending money. Similarly, when the Federal Reserve wishes to add to banking reserves, it can buy a government security with a forward commitment to sell it back. It calls this transaction a repo because the Fed counterparty is borrowing money.
Source: Wikipedia — Repurchase agreement (CC BY-SA)
Key concepts
How Repurchase agreement connects to the ideas, people and events around it.
In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.
The shadow banking system is the collection of non-bank financial intermediaries (NBFIs), or nondepository financial institutions (NDFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations.
The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.
Investment banking is an advisory-based financial service primarily for corporations, governments, and institutional investors.
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.
A mortgage-backed security (MBS) is a type of asset-backed security which is secured by a mortgage or collection of mortgages.
A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may fail in the near future.
The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis.
Revise Repurchase agreement
Flashcards and a quick quiz, built from this map.
Questions about Repurchase agreement
What is Repurchase agreement?
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of secured short-term borrowing, usually, though not always, using government securities as collateral. A contracting party sells a security to a lender and, by agreement between the two parties, repurchases the security back shortly afterwards, at a slightly higher contracted price.
What are the key concepts related to Repurchase agreement?
The main concepts connected to Repurchase agreement include Loan, Shadow banking system, Money market, Investment banking, Collateral (finance), Mortgage-backed security, Bank run, Subprime mortgage crisis. Each is linked on the map above with its own summary.
Which exams cover Repurchase agreement?
Repurchase agreement is part of Banking & Financial Awareness, which appears in the syllabus of IBPS PO, IBPS Clerk, IBPS RRB, IBPS SO, SBI PO, SBI Clerk and 4 more exams.