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Series 7 practice questionmediumMoney Market — Reverse Repos

A reverse repurchase agreement, from the investor's perspective, is essentially:

  1. AAn agreement to buy bonds at a future date at a lower price
  2. BA short-term loan where the investor lends money and receives securities as collateral✓ Correct answer
  3. CA long-term investment in government bonds
  4. DA sale of securities with no obligation to repurchase
Explanation

Why B — A short-term loan where the investor lends money and receives securities as collateral

In a reverse repo, the investor (buyer) provides cash to the dealer and receives securities as collateral, with the agreement that the dealer will repurchase the securities at a higher price. From the investor's perspective, it functions as a short-term collateralized loan. The investor earns the difference between the purchase and resale price as interest income. Reverse repos are considered very safe due to the government securities collateral.

Turn it into reps

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