securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. The interest rate is fixed, and interest will be paid at maturity by the dealer. The Fed is a major purchaser of repos providing needed liquidity for traders of short-term money market instruments. A repurchase agreement involves the sale of a security with an agreement to repurchase the same security back at a higher price at a later date. A dealer sells securities to a counterparty with the agreement that he will buy them back at a higher price on a specific date. Variations, two main variations on the standard repo include: Reverse, repo - The reverse repo is the opposite of a repo. Repurchase agreements are strictly short-term investments, and their maturity period is called the "rate the "term" or the "tenor.". This transaction involves a spot sale for the security and forward contract on the repurchase date to lock in the agreed rate. As with any loan, the creditor bears the risk that the debtor will be unable to repay the principal.
The repo market is also an important outlet for mutual fund managers of both money market funds and short-term bonds dealing in Treasury securities. The, federal Reserve enters into repurchase agreements to regulate the money supply and bank reserves. What is a 'Repurchase Agreement. In fact, counterparty credit risk is the primary risk involved in repos. It's similar to the factors that affect bond interest rates.
Open Repurchase Agreements, the major difference between a term and an open repo lies in the amount of time between the sale and the repurchase of the securities. Repo a repurchase agreement ( repo ) is a form of short-term borrowing for dealers in government securities.