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Reviewed by May 18, 2022| Updated on
Repurchase agreements are usually considered safe investments because the security in question functions as collateral, which is the reason why most agreements involve U.S. Treasury bonds. Listed as a money-market instrument, a repurchase agreement works in effect as a short-term, collateral-backed, interest-bearing loan. The buyer works as a short-term lender, while the seller acts as a short-term borrower. The securities being sold are known to be the collateral. Thus the purposes of both parties, secured funding and liquidity, are met.
Repurchase agreements can take place within a variety of parties. The Federal Reserve enters into repurchase agreements to control the money supply and bank reserves. Individuals normally use these agreements to finance the purchase of debt securities or other kinds of investment. Repurchase agreements are strictly short-term investments, and their maturity period is known as the "rate," the "term", or the "tenor."