101 Concepts for the Level I Exam
Concept 81: Repurchase Agreements (Repos)
- A repurchase agreement is similar to a collateralized loan.
- This involves the sale of a security (collateral) with a simultaneous agreement by the seller (borrower) to buy the same security back from the purchaser (lender) at an agreed-on price in the future.
- The repo rate is the implicit interest rate of a repurchase agreement.
- The repo margin (haircut) is the difference between the amount borrowed and the value of the collateral.
- Repurchase agreements are a common source of funding for bond dealers.
- Instead of borrowing funds if a bond dealer is lending funds, then this agreement is known as a reverse repo.