ACCA Financial Management (F9) Certification Practice Exam

What is the primary function of a Repurchase Agreement (Repo)?

1. To provide short-term loans to individuals

2. To sell government securities to retail investors

3. To facilitate the temporary sale and repurchase of financial instruments

4. To issue long-term bonds at fixed interest rates

The correct answer is: To facilitate the temporary sale and repurchase of financial instruments

The primary function of a Repurchase Agreement (Repo) is indeed to facilitate the temporary sale and repurchase of financial instruments. In a repo transaction, one party sells a security to another party with an agreement to repurchase the same security at a specified price on a later date. This arrangement allows sellers to access short-term liquidity by using their securities as collateral while also providing the buyer with a relatively low-risk investment. Repos are commonly used in the banking and financial sectors to manage short-term funding needs. Financial institutions can leverage their assets without permanently selling them, allowing for flexibility in cash management. This mechanism also supports the overall liquidity and stability of financial markets, making it a crucial tool for institutions looking to ensure adequate funding. On the other hand, the other options do not accurately represent the function of a repo. Providing short-term loans to individuals does occur in financial markets, but it does not capture the essence of how repos work. Selling government securities to retail investors is a process of primary market transactions, not the temporary nature of repos. Issuing long-term bonds at fixed interest rates pertains to long-term capital market operations, which is distinctly different from the short-term nature of repurchase agreements.