Which one of the following statements is true regarding repurchase agreements?
A) Their initial maturity is greater than 1 year.
B) They are an unsecured form of borrowing.
C) U.S. Treasury securities serve as their collateral.
D)They make explicit, rather than implicit, interest payments.

Question

Quizplus · Accepted Answer

Repurchase agreements, also known as repos, involve the sale of securities, usually U.S. Treasury securities, with a commitment to repurchase them at a later date at a slightly higher price. This higher price represents the interest paid on the transaction and is called the repo rate. Therefore, repos make explicit, rather than implicit, interest payments. Their initial maturity is typically less than 1 year, usually overnight or up to 30 days. Repurchase agreements are secured by the collateral of the securities sold. They are considered a secured form of borrowing since the buyer of the securities has the right to sell them if the seller defaults on the repurchase agreement.

Which One of the Following Statements Is True Regarding Repurchase