Final answer:
When a dealer purchases Treasury notes but needs to borrow money to pay for the purchase, they often borrow through a repo (repurchase agreement). In a repo, the dealer sells the Treasury notes to a lender with an agreement to buy them back at a later date.
Step-by-step explanation:
When a dealer purchases Treasury notes but needs to borrow money to pay for the purchase, the dealer often borrows through a process called a repo (repurchase agreement). In a repo, the dealer sells the Treasury notes to a lender with an agreement to repurchase them at a later date, usually at a slightly higher price. This allows the dealer to access the funds needed to pay for the purchase upfront. Once the dealer repurchases the Treasury notes, the repo transaction is complete.
For example, let's say a dealer wants to buy $100,000 worth of Treasury notes. The dealer may enter into a repo agreement with a lender to sell the Treasury notes for $100,000 and agree to repurchase them for $101,000 in a month's time. This way, the dealer gets the funds they need to make the purchase immediately, and the lender earns interest on the loan.