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Simple English definitions for legal terms
repurchase agreement
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A quick definition of repurchase agreement:
A repurchase agreement, also known as a repo, is a type of short-term loan. In a repo, one party sells a security to another party with a promise to buy it back on a specific date at a specific price. It's like borrowing money with a valuable item as collateral, and then paying back the loan to get the item back.
A more thorough explanation:
A repurchase agreement, also known as a repo, is a type of short-term loan agreement between two parties. In this agreement, one party sells a security to another party with a promise to buy back the security on a specified date at a specified price.
For example, let's say Company A needs some cash for a short period of time. Company A can sell some of its securities to Company B with a promise to buy them back in a week at a slightly higher price. This way, Company A gets the cash it needs, and Company B earns a profit on the transaction.
Another example is when a bank needs some cash to meet its reserve requirements. The bank can sell some of its securities to another bank with a promise to buy them back at a later date.
Repurchase agreements are commonly used in the financial industry to raise short-term funds. They are considered low-risk investments because they are collateralized by securities. If the borrower defaults on the loan, the lender can sell the securities to recover their money.