what is the repo rate?

20th Nov 2009 by cocacolabuffet.blogspot.com

Repurchase agreement, or often called repo, is an agreement between a borrower and a lender in which the borrower sells a security (bonds, equities, etc) to the lender in exchange for cash. The borrower agrees to buy back the security at a certain price on a later date. Until that date, the security serves as collateral to protect the lender from possible default by the borrower.
The difference between the initial selling price and the repurchase price of the security as a fraction of the initial selling price is equivalent to the interest rate on the loan, which is called the repo rate.
For example, suppose John (the borrower/repo seller) sells $1,000,000 worth of Treasury bond to the Federal Reserve (the lender/repo buyer) and agrees to buy back the bond after 1 month for $1,010,000. The(annualized) repo rate is 12%.
repo rate =[($1,010,000-$1,000,000)/($1,000,000)]x12


This answer is the subjective opinion of the writer and not of FinancialAdvisory.com