Investments, tenth edition

  Repos and Reverses 

 

Dealers in government securities use  

  repurchase  agreements,       also  called  “repos”  or 

“RPs,” as a form of short-term, usually overnight, borrowing. The dealer sells govern-

ment securities to an investor on an overnight basis, with an agreement to buy back those 

securities the next day at a slightly higher price. The increase in the price is the overnight 

interest. The dealer thus takes out a 1-day loan from the investor, and the securities serve 

as collateral. 

 A   term repo  is essentially an identical transaction, except that the term of the implicit 

loan can be 30 days or more. Repos are considered very safe in terms of credit risk because 

the loans are backed by the government securities. A  reverse repo  is the mirror image of 

a repo. Here, the dealer finds an investor holding government securities and buys them, 

agreeing to sell them back at a specified higher price on a future date.  

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6/18/13   7:41 PM

6/18/13   7:41 PM

Final PDF to printer

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32  P A R T  

I

 Introduction