repurchase agreement
A short-term borrowing arrangement where a party sells securities and agrees to repurchase them at a slightly higher price, effectively a collateralized short-term loan.
Example
“The bank funded its Treasury portfolio using overnight repo agreements — selling bonds to get cash and buying them back the next morning.”
Memory Tip
REPO = sell securities today, buy them back tomorrow at a higher price. Collateralized overnight lending.
Why It Matters
Repurchase agreements are fundamental to how banks and financial institutions manage their short-term cash needs and liquidity. Understanding this concept helps you grasp how financial markets operate behind the scenes and why sudden disruptions in repo markets can affect broader economic stability and interest rates.
Common Misconception
Many people think a repurchase agreement is primarily a way to invest money and earn returns, but it is actually a borrowing mechanism. The party selling securities is the one borrowing money, not investing, and the slightly higher repurchase price simply represents the interest cost of that short-term loan.
In Practice
A bank needs cash for one week and sells 100 million dollars worth of Treasury bonds to an investment firm for 99.95 million dollars today. The bank agrees to buy back those same bonds in one week for exactly 100 million dollars, meaning the investment firm earns 50,000 dollars for providing the one-week loan and holding the Treasury bonds as collateral.
Etymology
REPURCHASE (buy back) AGREEMENT (contract). An AGREEMENT to REPURCHASE (buy back) securities.
Common Misspellings
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See Also
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