What do you understand by the term Repo Rate?

The difference between the repurchase and sale prices associated with a given repossession transaction is known as repo rate. Generally, the initial sale price is lower than the repurchase price and that must be paid in order to regain possession of the item that was traded . repo rate 2

It depends on what type of relationship is there between the lender and the debtor, that the lender may choose to apply a discount rate to the percentage that serves as the interest on the loan.

How this type of transaction works?

Perhaps to understand the process of a repo rate the easiest way is to consider an example of how this type of transaction works. Debtor A is willing to receive a loan from Lender B, but some type of collateral is required by the lender in order to cover the amount of the loan.

Thus, a collection of jewelry is provided by a debtor that is currently valued at approximately the amount of the loan. Lender B accepts the jewels as collateral and then in return for approving the loan takes possession of them.

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The debtor has to repay both the basic loan amount in addition to that a percentage of the loan to the lender. Once the loan amount and the percentage is received by the lender, the jewels are released by the lender and it again become the property of the debtor.

Utilization of a repo rate arrangement is common

In many different types of commerce and finance situations, the utilization of a repo rate arrangement is common. In lending resources to one another, nations often use this model, either issuing government securities through a central bank to guarantee the loan amount, or pledging territories that are in the position of the nation receiving the loan.

The collateral is kept in safety deposit box

The collateral that is being used in a repo rate transaction can be just about any item of value that the lender will accept. With this lending model Land, securities, or other types of property are commonly employed . It usual for both components of the transaction to be conducted by a single banking institution. The property may be stored in a safety deposit box depending on the nature of the collateral until the loan is repaid in full or the debtor defaults and the property comes into the permanent possession of the lender.

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