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A repurchase agreement is the equivalent of a short-term, collateralized loan. An owner of marketable securities sells those securities to a buyer for cash. As part of the deal, the seller agrees to buy back the securities at a later date. That later date can be the next day, or maybe the next week. The price paid to repurchase the securities is higher than the original selling price. The spread between the original price and the repurchase price is equivalent to interest. 

Repurchase agreements are often used by institutions with available cash that are looking for quick, easy ways to get a return on their money with little risk.

Shelly has $1 million in treasury bonds. Lindy has $1 million in excess cash and wants to earn some revenue without tying it up in a long-term investment. 

Shelly is the seller and borrower in the repurchase agreement. Lindy is the buyer and lender. Shelly agrees to sell the Treasury Bonds for $1 million, but on the condition that she buys them back from Lindy next week for $1 million, plus an additional $956. The $956 is considered the equivalent of interest. 

One risk to keep in mind: the original seller might be unable to repurchase the securities. In that case, the buyer has the right to sell the securities on the market. To mitigate this risk, repurchase agreements are usually collateralized with securities with a market value in excess of the amount paid for them. 

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