Series 7 practice questionmediumMoney Market — Repurchase Agreements
In a repurchase agreement (repo), the dealer:
- APermanently sells securities to an investor
- BSells securities with an agreement to repurchase them at a higher price on a specified date✓ Correct answer
- CBorrows securities from another dealer to cover short sales
- DPledges securities as collateral for a long-term loan
Explanation
Why B — Sells securities with an agreement to repurchase them at a higher price on a specified date
A repurchase agreement (repo) is effectively a short-term collateralized loan. The dealer sells government securities to an investor (lender) and simultaneously agrees to repurchase them at a slightly higher price on a specified future date. The difference between the sale price and repurchase price represents the interest cost to the dealer. Repos are commonly used by dealers to finance their government securities inventory.
Turn it into reps
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