Repo Rate
The interest rate on a repurchase agreement, where one party sells securities and agrees to repurchase them at a slightly higher price.
What is Repo Rate?
A repurchase agreement (repo) is a short-term secured borrowing transaction in which one party sells securities (usually Treasury bonds or agency bonds) to another party and agrees to repurchase them at a slightly higher price on a specified future date—typically overnight or within a few days. The difference between the sale price and the repurchase price represents the interest cost, expressed as an annualized rate called the repo rate. Repos are a critical tool for money market funding: broker-dealers and banks use repos to finance their bond inventories, while cash-rich investors (money market funds, pension funds) use reverse repos to earn short-term returns on idle cash with minimal credit risk.
Example
A primary dealer borrows $100 million overnight by selling $100 million of Treasury bonds to a money market fund and agreeing to repurchase them the next day for $100,013,699. This $13,699 difference represents one day's interest at an annualized repo rate of 5.00%: ($100,000,000 × 5.00% × 1/365). The Treasury bonds serve as collateral, making the loan essentially risk-free for the lender.
Source: Federal Reserve Bank of New York — Repo and Reverse Repo