What type of investment is a repurchase agreement?

What type of investment is a repurchase agreement?

• A. Long-term equity investment
• B. A form of debt security
• C. A money market transaction
• D. A type of currency exchange

Answer: (C)

A repurchase agreement, commonly known as a repo, is indeed best categorized as a money market transaction. In a repo, one party sells a security to another with the agreement to repurchase it at a later date, usually just overnight, at a predetermined price. This mechanism is frequently used for short-term borrowing and lending, making it a vital component of the money market where instruments are typically characterized by high liquidity and short maturities. Since repos involve high-quality securities like government bonds and are generally secured transactions, they are regarded as low-risk investments that provide a way for institutions to manage liquidity and finance their operations. The nature of repos aligns them closely with the dynamics of the money market, differentiating them from long-term equity investments, debt securities, or currency exchange transactions, which do not have the same quick turnaround or liquidity profile.

A repurchase agreement, commonly known as a repo, is indeed best categorized as a money market transaction. In a repo, one party sells a security to another with the agreement to repurchase it at a later date, usually just overnight, at a predetermined price. This mechanism is frequently used for short-term borrowing and lending, making it a vital component of the money market where instruments are typically characterized by high liquidity and short maturities.

Since repos involve high-quality securities like government bonds and are generally secured transactions, they are regarded as low-risk investments that provide a way for institutions to manage liquidity and finance their operations. The nature of repos aligns them closely with the dynamics of the money market, differentiating them from long-term equity investments, debt securities, or currency exchange transactions, which do not have the same quick turnaround or liquidity profile.