Which money market instrument is essentially a collateralized loan using securities such as Treasury bills as collateral?

• A. Repurchase Agreement
• B. Banker’s Acceptance
• C. Commercial Paper
• D. Treasury Bills

Answer: (A)

Think of a repurchase agreement as a short-term loan that is secured by securities. In this setup, one party needs cash and sells securities—often Treasury bills or other government securities—to another party with an agreement to buy those securities back at a later date for a higher price. The cash lender holds the securities as collateral, so if the borrower defaults, the lender can sell the collateral to recover the money. The difference between the sale price and the repurchase price represents interest on the loan, known as the repo rate. This structure is exactly a collateralized loan financed by securities, which is why it’s used as a money market instrument.

The other options don’t fit this description. A banker’s acceptance is a bank-guaranteed payment in trade finance, not a collateralized loan. Commercial paper is an unsecured short-term debt instrument issued by corporations. Treasury bills are government securities themselves, not loans secured by collateral.