Financing the purchase of the bonds

Repurchase agreements (a.k.a. repo):
One party (seller or security lender) sells a security to another (buyer or security borrower) with an agreement to buy it back at a specified price on a later date. Security lender does a repo, security borrower does a reverse repo.

Reverse repo:
Used by institutional investors in bond markets where it allows to finance a larger portion of the purchase price than margin buying.

If 1 day =>overnight repo
If >1 day => term repo

Margin buying:
· As a collateral loan by buying stock partly with cash and partly with a loan. It is more common for individual than institution.
· The Fed sets the cash component, or the margin, at 50%.

In equity markets, it is used by individual and institutional borrowers.

Cost of loan = Call money rate + service charge
where:
Call money rate is the rate the broker borrowed from bank & investor borrow from broker in turn at call money rate plus service charge