Final answer:
A repurchase agreement, or repo, is a short-term loan where securities are sold and later repurchased at a higher price, reflecting an interest payment. It is a way to raise temporary funds and invest cash while having collateral to secure the transaction. The correct answer to the question is option A) A loan collateralized by securities that are repurchased at a higher price.
Step-by-step explanation:
A repurchase agreement (repo) is essentially a short-term loan that is collateralized by securities. In a repo transaction, a party sells securities to another party with an agreement to repurchase those securities at a later date, usually the following day, at a higher price.
The difference in the selling and repurchase price reflects the interest payment for the loan. This transaction allows one party to raise temporary funds by borrowing cash while using the securities as collateral, and allows the other party to earn interest on their cash holdings with the added security of collateral.
Considering the options provided:
- A) A loan collateralized by securities that are repurchased at a higher price.
- B) A long-term investment in real estate.
- C) A government bond with a fixed interest rate.
- D) A form of insurance for investors.
The correct option is A) A loan collateralized by securities that are repurchased at a higher price.