What is Repo Rate, Reverse Repo Rate ?

A repo or repurchase Agreement is an instrument of money market. Usually reserve bank (federal bank in U.S) and commercial banks involve in repo transactions but not restricted to these two. Individuals, banks, financial institutes can also participate in repurchase agreement.

Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date. In this way for the lender of the cash (usually Reserve Bank) the securities sold by the borrower are the collateral against default risk and for the borrower of cash (usually commercial banks) cash received from the lender is the collateral. Read more

July 19, 2008 | Filed Under Bonds | Leave a Comment

Bills of Exchange

In normal course of business, companies own account receivables. It’s the money to be received in future against the supplies made on credit. The seller draws a bill on the buyer with the details like when would the cost of goods or services be paid and on what future date, and gets it endorsed by the buyer. Now the seller can sell this bill to a third party at a discount to the value specified on the bill. This is called ‘Bill of exchange’. Read more

June 29, 2008 | Filed Under Bonds | 1 Comment

Call Money Market

It’s the money used to finance short term needs and lend short term surpluses, ranging from overnight to maximum tenor of 14 days. ‘Overnight’ usually means 12:00 p.m. one day to 12:00 p.m. the next day. Usually brokers and dealers borrow money from call money market to cover their customers’ margin accounts or finance their own inventory of securities. Banks act as both lenders and borrowers of this market. Read more

June 29, 2008 | Filed Under Bonds | 2 Comments

Commercial Paper/CP

Commercial paper is structurally similar to a CD or T-Bill, but they are issued by corporates. Corporates issue commercial papers to raise money to meet their short term requirements. Compared to CDs and T-Bills they are less secured instruments. There are restrictions on corporates to issue CPs. Corporates issuing CPs must have a very good balance sheet size. Read more

June 22, 2008 | Filed Under Bonds | Leave a Comment

Certificate of Deposit/CD

Certificate of deposits are offered to investors by banks just like a normal deposits. But the difference is certificate of deposits are short term wholesale deposits and they are tradable. An investor holding the certificate of deposit can sell it to another investor. Because of liquidity interest rates on CDs are normally less than that on ‘sight’ deposits. Read more

June 22, 2008 | Filed Under Bonds | 1 Comment

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