Borrowing funds via repurchase agreements, Financial Management

Assignment Help:

Repurchase agreement is a contract wherein the seller of a security agrees to buy back the same security from the purchaser at a specified price and time. It is also known as repo or buyback. The price at which the seller agrees to buy back is known as repurchase price. And the date by which the security is to be repurchased is known as repurchase date. Repurchase agreement can be treated as a collateralized loan, where the collateral is sold and later re purchased. The security acts as collateral in repurchase agreements.

A dealer can use repurchase agreement or 'repo' market to obtain finance by pledging the purchased security as collateral to the loan. The interest rate the dealer agrees to pay is known as repo rate. The term of the loan, i.e. the date by which the dealer has to buyback the security and the repo rate are specified in the agreement. In an overnight repo, the term of the loan is one day, in a term repo the term of the loan is more than one day. The difference between the buyback price and the sale price is the actual interest cost of the loan.

Amount of interest depends on the repo rate, the term of the loan and the amount borrowed. The formula to calculate interest is as follows:

Interest = Amount Borrowed x Repo rate x Repo term/360.

Illustration 

Amount borrowed = Rs.30,00,000

Repo rate = 0.06

Repo term = 1 day

Therefore,

   Interest = Rs.30, 00,000 x 0.06 x 1/360 = Rs.500.

Dealers can reduce their cost of funding by using repo market for borrowing funds on a short-term basis. The cost of bank financing is higher than the cost involved while using repo market. To the customer, repo market offers better yield on a short-term loan and the highly liquid nature of the market makes it more attractive.

Reverse repo is an agreement where a buyer purchases securities with an agreement to resell them at a specified price (which is higher than the buying price) on a specified date.


Related Discussions:- Borrowing funds via repurchase agreements

Determine about the sales agents, Determine about the Sales agents Norm...

Determine about the Sales agents Normally used for more effective sales and marketing activities for a product for example AVON (cosmetics) door to door agents in the UK. -

Alternative summarised version of tests of controls, Alternative summarised...

Alternative summarised version of tests of controls · Segregation of duty (staff records are separate from wages department) · Documentation ( written evidence ) ·

Tests in investments, Tests in Investments There are many rules that sp...

Tests in Investments There are many rules that specify how the past data of share prices can be used to obtain a clue regarding the future prices of shares. Such rules would be

Futures and forward, what factors influence the decision to use futures or ...

what factors influence the decision to use futures or forwards contracts

Report on bank''s predicts of exchange rates, Q. Report on bank's predicts ...

Q. Report on bank's predicts of exchange rates? Report on banks' predicts of exchange rates. The three banks have produced extensively differing forecasts which even involve

Cost of redeemable preference share capital, Q. Cost of Redeemable Preferen...

Q. Cost of Redeemable Preference Share Capital? Cost of Redeemable Preference Share Capital: - Redeemable preference capital has to be returned to the preference shareholders s

Financial information, A)  What are the statements of financial information...

A)  What are the statements of financial information? Talk about two items from each. B)   Describe statement of changes in financial positions, with an example.

List a few types of non-price rationing systems, List a few types of non-pr...

List a few types of non-price rationing systems. (a) Queuing. (b) Favored customers. (c) Rationing coupons.

How are libor, Q. How are LIBOR, TIBOR and EURIBOR determined? London I...

Q. How are LIBOR, TIBOR and EURIBOR determined? London Inter Bank Offered rate ( LIBOR) and is the rate of interest at which banks offer funds to other banks in marketable siz

par value, The face value of the debt security can be thought of as ...

The face value of the debt security can be thought of as the principal amount on which interest is paid by the issuer. It is the amount the issuer is willing to r

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd