TeachMeFinance.com - explain repurchase agreement (REPO)
repurchase agreement (REPO) -- a financial transaction in which a dealer in effect borrows money by selling securities and simultaneously agreeing to buy them back at a higher price at a later time. The dealer invests the money paid for the securities, hoping to get a higher return than he owes on his obligation to repurchase the securities. Repurchase agreements are commonly called "repos," and they function in a way similar to a secured loan with the securities serving as collateral. In a reverse repurchase agreement, the dealer in effect loans money by buying securities and agreeing to sell them back to the customer at a higher price at a later date. In either case, the difference between the bought and sold price of the securities constitutes the yield on the transaction. See dollar reverse repurchase agreement. Also see retail repos.
dollar reverse repurchase agreement -- a financial transaction that is similar to a reverse repurchase agreement in which a dealer, in effect, loans money by buying a security and agreeing to sell it back to the customer at a higher price at a later date. In a dollar reverse repurchase agreement (dollar reverse repo) the dealer does not sell back the exact same security but another, substantially identical security. See repurchase agreement.
retail repos -- repurchase agreements in which a thrift institution or bank sells a portion of a government security to its customer for cash, and simultaneously agrees to buy back the security for the same price plus interest at a future specified date. Such transactions are considered to be investments, not deposits, and thus are not federally insured. See repurchase agreement.
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