What's a Repo and Reverse Repo Transaction?

Repo is a contract or agreement between two parties where one party sells a security at a specified rate(lower) with a commitment to buy back the security at a specified future date at a higher price. The difference between the two prices is the implied interest earned by the buyer(lender of funds) on the transaction. These transactions are executed on short term basis

The borrower uses Repos to borrow funds for a short period of time and lender uses the Repos to invest the excess proceeds for a short duration and to get access to hard to find collaterals.

When borrower borrows the fund by keeping a security as collateral it is termed as Repo Transaction while from lender’s side it is termed as Reverse Repo Transactions .

Suppose, A wants to borrow $100 from B by selling him(collateral) a $100 XYZ bond(market value) for 30 days and contracts to buy back the bond at $100+0.5% interest, so after 30 days A will pay $100[1+(0.5%*30/360)] which equals to $104.26 to buy back the XYZ bond.

Here, the $4.26 is the implied interest earned by B in the transaction

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