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Repurchase agreements, or repos, are an essential funding source for various market participants, including banks. In a repo, one party sells a security to another with a commitment to repurchase it at a later date at a specified price. The buyer effectively lends funds to the seller, using the security as collateral. The seller, or borrower, must repay the lender on the repurchase date to regain the security. Repos can be overnight or for a longer term, with the repurchase price exceeding the selling price to cover interest charges. The repo rate, the implied interest rate, is the annualized percentage difference between the repurchase and selling prices. Repos are popular due to their lower interest costs compared to bank loans.
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