repurchase agreement or "repo" is the sale of a security with a com- mitment by the seller to buy the same security back from the purchaser at a specified price at a designated future date. For example, a dealer who owns a 10-year U.S. Treasury note might agree to sell this security (the "seller") to a mutual fund (the "buyer") for cash today while simultaneously agree- ing to buy the same 10-year note back at a certain date in the future (or in some cases on demand) for a predetermined price. The price at which the seller must subsequently repurchase the security is called the repurchase price and the date that the security must be repurchased is called the repur- chase date.1Simply put, a repurchase agreement is a collateralized loan where the collateral is the security that is sold and subsequently repur-   1As noted, repurchase agreements can be structured such that the transaction is ter- minable on demand.   119     chased. One party (the "seller") is borrowing money and providing collat- eral for the loan; the other party (the "buyer") is lending money and accepting a security as collateral for the loan. To the borrower, the advan- tage of a repurchase agreement is that the short-term borrowing rate is lower than the cost of bank financing, as we will see shortly. To the lender, the repo market offers an attractive yield on a short-term secured transac- tion that is highly liquid. This latter aspect is the focus of this chapter.       THE BASICS   Suppose a government securities dealer purchases a 5% coupon Treasury note that matures on August 15, 2011 with a settlement date of Thurs- day, November 15, 2001. The face amount of the position is $1 million and the notes full price (i.e., flat price plus accrued interest) is $1,044,843.75. Further, suppose the dealer wants to hold the position until the end of the next business day which is Friday, November 16, 2001. Where does the dealer obtain the funds to finance this position? Of course, the dealer can finance the position with its own funds or by borrowing from a bank. Typically, though, the dealer uses a repurchase agree- ment or "repo" market to obtain financing. In the repo market, the dealer can use the purchased Treasury note as collateral for a loan. The term of the loan and the interest rate a dealer agrees to pay are specified. The interest rate is called the repo rate. When the term of a repo is one day, it is called an over- night repo. Conversely, a loan for more than one day is called a term repo. The transaction is referred to as a repurchase agreement because it calls for the securitys sale and its repurchase at a future date. Both the sale price and