Repurchase agreements are used by a company to get a short-term loan from another company. Large firms often require funds for meeting the daily expenses in the short term. In such a scenario, they enter into repurchase agreements with other firms which have a surplus amount of funds and then borrow money from them to pay for its short-term debt. In return for the funds, the borrower company pays some sort of security to the lender company as collateral so that if the borrower is not able to pay back the amount, the lender can sell those securities and get his money back.
Short-term repo is a kind of repurchase agreement where the money is lent for a very short period, sometimes just one day. Through long-term repos companies can lend money for more than a month’s duration and also get an interest amount. US Treasury Bills are often used as collateral in repurchase agreements as they are safe and stable instruments.
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Sample Repurchase Agreement
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