What Serves as Collateral in a Repurchase Agreement Quizlet

A repurchase agreement, also known as a repo, is a financial transaction where one party sells securities to another party with the agreement to buy them back at a later date. The buyer of the securities provides collateral as a guarantee for the seller that the securities will be repurchased. In this article, we will explore what serves as collateral in a repurchase agreement quizlet.

In a repurchase agreement, the securities sold by the seller are typically government bonds, treasury bills, or other highly-rated securities. These securities are considered low-risk investments and are usually easy to sell on the open market. The seller agrees to buy back the securities at a fixed price, called the repo rate.

Collateral serves as a guarantee that the seller will receive payment if the buyer fails to repurchase the securities. In a repurchase agreement, the collateral can be in the form of cash, securities, or other assets with a liquid market value. The collateral must be of equal or greater value than the securities sold, and the value of the collateral is typically marked-to-market on a daily basis.

Cash is the easiest form of collateral to use in a repurchase agreement. The buyer of the securities simply provides cash to the seller, which the seller can use for other investments or to meet other financial obligations. The cash serves as collateral for the securities sold, and the seller can repurchase the securities at the agreed-upon rate.

Securities can also be used as collateral in a repurchase agreement. The buyer of the securities provides the seller with other securities of equal or greater value as collateral. These securities can be government bonds, treasury bills, or other highly-rated securities. The seller can sell these securities if the buyer fails to repurchase the securities, and the value of the collateral is marked-to-market on a daily basis.

Other assets with a liquid market value can also be used as collateral in a repurchase agreement. These assets can include stocks, corporate bonds, or other investments. The buyer and seller agree on the value of the collateral, and the collateral is marked-to-market on a daily basis.

In conclusion, collateral serves as a guarantee in a repurchase agreement that the securities sold will be repurchased by the buyer. Cash, securities, or other assets with a liquid market value can be used as collateral, and the value of the collateral is marked-to-market on a daily basis. By providing collateral, the buyer of the securities reduces the risk for the seller and ensures that the seller will receive payment for the securities sold.