A repurchase agreement example is easiest to follow as what it really is: a short-term secured loan dressed up as a sale and buyback. One party sells securities for cash today and commits to buying them back at a slightly higher price on a set future date. The price difference is the interest. Below is a full walkthrough of a 7-day Treasury repo between a bank that needs cash and a money market fund that has cash to lend, including the numbers, the mechanics, and the journal entries each side records.
The Deal Terms
Bank Alpha needs roughly $9.8 million in short-term funding. Money Market Fund Beta has idle cash and wants a safe, short return. They agree to these terms:
- Collateral: $10,000,000 face value of U.S. Treasury bills
- Haircut: 2%
- Repo rate: 5.00% per year
- Term: 7 days
The haircut is the safety margin. Fund Beta will not advance the full market value of the collateral. Applying a 2% haircut to $10 million means Fund Beta lends $9,800,000. If the Treasury bills fall in value before maturity, that $200,000 cushion absorbs the loss before Fund Beta’s principal is exposed. Government bonds carry the smallest haircuts because their prices are stable and they trade in deep, liquid markets. Corporate bonds, equities, and securitized products command larger haircuts to compensate for greater volatility.
The contract governing the trade is almost always the standardized Master Repurchase Agreement, which spells out margin maintenance rules, default procedures, and each party’s rights.1SIFMA. MRA and GMRA Documentation
Day 1: Cash Advanced, Collateral Delivered
Fund Beta wires $9,800,000 to Bank Alpha. Bank Alpha transfers the $10 million face value of Treasury bills into Fund Beta’s custodial account. Cash settles through the Federal Reserve; for government securities, Fedwire processes the transfer in real time throughout the day, with cash settling transaction by transaction.2Clearstream. Settlement Process – U.S.A.
At the close of day one, Bank Alpha has the cash it needed. Fund Beta holds the collateral. The repurchase price is already fixed in the contract.
Calculating the Repurchase Price
Repo interest uses an actual/360 day-count convention. Actual calendar days in the numerator, 360 in the denominator. The formula:
Interest = Principal × Annual Rate × (Days ÷ 360)
Running the numbers: $9,800,000 × 0.05 × (7 ÷ 360) = $9,527.78.
The repurchase price is $9,800,000 + $9,527.78 = $9,809,527.78. That $9,527.78 is Fund Beta’s return for lending for a week and Bank Alpha’s cost of temporary liquidity. Once written into the agreement on day one, the repurchase price does not change, no matter what happens to market rates over the following seven days.
Day 7: The Unwind
On maturity, the trade reverses. Bank Alpha wires $9,809,527.78 to Fund Beta. Fund Beta returns the $10 million of Treasury bills to Bank Alpha. Both sides end up where they started, except Fund Beta earned $9,527.78 and Bank Alpha had use of $9.8 million for the week.
Journal Entries for the Seller
Even though the contract uses the words “sale” and “repurchase,” the transaction is booked as a secured borrowing on both sides. The reason sits in FASB Accounting Standards Codification Topic 860: when the seller has both the contractual right and the obligation to buy back the same securities before they mature, the seller retains effective control and cannot derecognize the assets.3Financial Accounting Standards Board. Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements All repo types get the same treatment, including those where the repurchase date matches the collateral’s maturity.4Financial Accounting Standards Board. Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
Bank Alpha’s books on day 1:
- Debit Cash $9,800,000
- Credit Securities Sold Under Agreements to Repurchase (liability) $9,800,000
The Treasury bills stay on Bank Alpha’s balance sheet, with a note disclosing they’ve been pledged. Over the 7 days, Bank Alpha accrues interest expense daily. On day 7:
- Debit Securities Sold Under Agreements to Repurchase $9,800,000
- Debit Interest Expense $9,527.78 (total across the term)
- Credit Cash $9,809,527.78
Journal Entries for the Buyer
Fund Beta records the mirror image. On day 1:
- Debit Securities Purchased Under Agreements to Resell (asset) $9,800,000
- Credit Cash $9,800,000
The collateral received is tracked off-balance sheet. Interest income accrues daily. On day 7:
- Debit Cash $9,809,527.78
- Credit Securities Purchased Under Agreements to Resell $9,800,000
- Credit Interest Income $9,527.78
When a Repo Qualifies as a Sale Instead
There is one important exception to the financing treatment. If the deal is structured so the seller loses effective control over the collateral, the transaction can qualify as a true sale. That happens when the buyer has an unrestricted right to sell or pledge the securities, or when the agreement covers assets that will mature during the repo term and cannot be reacquired.5Financial Accounting Standards Board. FASB Proposed Accounting Standards Update – Transfers and Servicing (Topic 860) Sale treatment removes the securities from the seller’s balance sheet entirely, which changes reported leverage and risk. The standard 7-day Treasury repo above does not meet those conditions and stays a financing.
What If Collateral Value Drops Mid-Term
The repurchase price is locked in, but the collateral’s market value is not. Both parties should revalue the securities frequently, ideally daily. If the value falls below the agreed threshold, the cash provider can issue a margin call, requiring the seller to deliver additional securities or cash to restore the cushion. The Master Repurchase Agreement sets deadlines for calling, agreeing on, and delivering that additional margin. Missing a margin call can trigger default provisions.
If the seller defaults and files for bankruptcy, the cash provider’s protection is the collateral. Repos carry a legal advantage over ordinary unsecured loans here: they are largely exempt from the automatic stay. Under 11 U.S.C. 559, a repo participant can immediately liquidate the collateral following a bankruptcy filing, without waiting for court permission. Any liquidation proceeds above the stated repurchase price plus expenses are property of the bankrupt seller’s estate and go through the normal claims process.6Office of the Law Revision Counsel. United States Code Title 11 – Section 559 The Bankruptcy Code defines “repurchase agreement” broadly to cover Treasury securities, agency debt, mortgage-related securities, and several other instrument types, with terms of up to one year or on demand.7Office of the Law Revision Counsel. United States Code Title 11 – Section 101