Repurchase agreement (repo)

Definition

Repurchase agreement (repo) in plain English

A repo is really just a short-term loan dressed up as a sale. Imagine you need cash overnight, so you "sell" your bike to a friend for $100 and promise to buy it back tomorrow for $101 — the extra dollar is basically the interest. In finance, the thing being sold is usually safe securities (like government bonds), which act as collateral: if the borrower can't buy them back, the lender simply keeps them. Banks use repos constantly to borrow cash for a day or two very cheaply and safely, because the lender is protected by holding something valuable the whole time.

Related Principles of Finance terms

• Agency bond
• American option
• Arbitrage pricing theory (APT)
• Asset-backed security (ABS)
• Basis risk
• Bid-ask spread
• Bookrunner
• Carhart four-factor model
• Clientele effect
• Collateralized debt obligation (CDO)