8 Months of Stimulus: Repurchase Agreements and Overnight Cash Rate

The video tutorial explains secured short-term loans, focusing on repurchase agreements (repos) and reverse repos. It describes how companies use repos to manage cash flow by temporarily selling assets to banks with an agreement to repurchase them later. The tutorial also covers how banks use similar agreements with the Federal Reserve to maintain liquidity. The focus then shifts to reverse repos, where banks deposit money with the Fed, and the potential concerns arising from increased cash flow back to the Fed.

What is the primary benefit for a company entering into a repurchase agreement with a bank?

• The company can sell its equipment permanently.

• It allows the company to delay employee paychecks.

• The company gains immediate cash flow with a low effective interest rate.

• The company can avoid purchasing new equipment.

How do regular banks use repurchase agreements with the Federal Reserve?

• By depositing cash directly into the Federal Reserve.

• By purchasing assets from the Federal Reserve.

• By selling low-risk assets like treasury bills for cash.

• By selling high-risk assets for cash.

What is the main purpose of repurchase agreements for banks?

• To ensure they have enough cash to meet withdrawal demands.

• To reduce their interest rates.

• To increase their asset holdings.

• To sell off unwanted assets.

In a reverse repo, what does the bank do with the Federal Reserve?

• The bank deposits cash with the Federal Reserve.

• The bank withdraws cash from the Federal Reserve.

• The bank buys assets from the Federal Reserve.

• The bank sells assets to the Federal Reserve.

What does the term 'overnight cash rate' refer to?

• The interest rate for personal savings accounts.

• The rate at which banks lend to each other overnight.

• The premium received or given on repurchase agreements.

• The interest rate for long-term loans.