Tuesday, May 12, 2009

Repurchase Agreements

A Repurchase Agreements (or simply repo)is an agreement by two parties in which the borrower sells and agrees to buy back a financial instrument such as a government bond,note,or T-bill. Suppose a bank needs short-term cash today. The bank can sell some Treasury bills to a firm such as IBM with the agreement that the bank will repurchase the T-bills in 30 days at a higher price.In effect,this repurchase agreement is a short-term loan in which the Treasury bills serve as collateral.repurchase agreements accounted for $71 billion of liquid assets in the United States in 1992.

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