Canadian Securities Course (CSC) Level 1 Practice Exam

Describe the Special Purchase and Resale Agreement (SPRA).

1. A mechanism to increase the interest rate

2. A process to reduce the money supply

3. Used to decrease the interest rate

4. Facilitates bank-to-bank lending

The correct answer is: Used to decrease the interest rate

A Special Purchase and Resale Agreement (SPRA) is primarily utilized to decrease the interest rate in the financial markets. In a SPRA, one party (usually a central bank or a financial institution) buys a security from another party with the agreement to sell it back at a later date, often at a slightly higher price, which represents an implicit interest rate. When a central bank employs SPRA transactions, it injects liquidity into the banking system, thus reducing the short-term interest rates. The additional liquidity makes it easier for banks to lend funds, leading to lower borrowing costs across the economy. As interest rates decrease, it can stimulate economic activity by making loans more accessible for businesses and consumers, thereby addressing concerns of slow economic growth. In contrast, mechanisms for increasing interest rates or processes aimed at reducing the money supply would not accurately describe the SPRA, as those would involve measures that contract the liquidity in the financial system rather than enhance it. The role of facilitating bank-to-bank lending aligns more closely with practices such as repurchase agreements (repos) rather than the specific framework and purpose of an SPRA.