LeoGlossary: Repurchase Agreement (Repo)
A repurchase agreement is a form of short-term lending. Under Repo, a primary dealer will sell a government security to an investor with an agreement to buy it back, often the next day, at a slightly higher price. This is the cheapest form of borrowing there is.
Since it is short-term, the maturity is from overnight to 1 year. This is known as "term" repo. Anything that goes further than a year doesn't have a maturity date and is known as "open".
The difference in price on the overnight is the implicit interest rate. This is also known as the Repo Rate.
To clarify, the seller of the security is the borrower, trying to get a hold of cash. The buyer is considered the lender, since that is the financial institution coming to the table with money. In this scenario, the security acts as collateral. Hence, Repo is really just a secured loan.
Posted Using LeoFinance Beta