Repurchase agreement repo or rp
• Short-term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller's point of view, the same transaction is a reverse repurchase agreement.
• An agreement whereby a bank of securities dealers sells a firm specific securities and agrees to repurchase them at a specific price and time.
• A holder of securities (dealer) sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use repo extensively to finance their positions. Exception: When the Fed is said to be doing repo, it is lending money, that is, increasing bank reserves. Usually done early in the day (before 2PM) to give time for agreement on collateral. Less costly and less volatile than the federal funds. Repo rate is an add-on rate. Annualized interest on repo transactions are computed as follows:
Annualized interest rate =
( 1 + Quoted repo rate* M /360 )^(365/ M) -1
where M is the maturity of the repo transaction. For overnight repos, M =1.
• An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. Also called a repo, it represents a collateralized short-term loan, where the collateral may be a Treasury security, money market instrument, federal agency security, or mortgage-backed security. From the purchaser (customer) perspective, the deal is reported as a reverse Repo.
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Reverse repurchase agreement
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