Canadian Securities Course (CSC) Level 1 Practice Exam

Describe the Sale and Repurchase Agreement (SRA).

1. Facilitates long-term investments

2. Used to decrease the interest rate

3. Used to increase the interest rate

4. Reduces the bank's reserve requirements

The correct answer is: Used to increase the interest rate

A Sale and Repurchase Agreement (SRA), commonly known as a repos, is primarily employed in the short-term borrowing and lending of securities to manage liquidity and funding. In this arrangement, one party sells securities to another with the agreement to repurchase them at a later date, usually at a slightly higher price. This mechanism is typically used by central banks or financial institutions to control the money supply and influence interest rates in the economy. In the context of this question, the correct answer implies that SRAs can effectively lead to an increase in interest rates. When financial institutions engage in repos, they are borrowing funds which can tighten liquidity in the market. This tightening can cause an upward pressure on interest rates, as there is less money available for lending. Thus, repos can be part of a broader strategy to increase short-term interest rates within the market. The other choices suggest uses and impacts that do not accurately reflect the primary functions and outcomes of SRAs. For instance, options emphasizing long-term investments or directly decreasing reserve requirements do not align with the immediate and liquidity-focused nature of these agreements.