In a repo transaction, the cash borrower pays an interest in repo rate for borrowing the cash. On the other hand, the cash lender gets a bond as collateral. In this transaction, it looks like the cash lender gets a bond as well as an interest payment. He ends up in a long position in a bond without any financing cost (instead with a repo interest as income). this seems to be contradict to what people say “financing cost for bond is repo rate” . can someone please explain to me where my confusion comes from please ?
In repo terminology the bid (buyside) is for the collateral, i.e. if one bids repo then one bids for the bonds. And if one offers repo, one owns the bonds and wants to lend the collateral for cash. (Note your question was phrased the other way around in terms of cash and I am trying to lean you toward more regularly used trading terminology.)
This resource [ https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/repo-and-collateral-markets/icma-ercc-publications/frequently-asked-questions-on-repo/ ], is very good for answering generic questions on repo.
Semantically, across different jurisdictions, a repo transaction is just a committed buy and sell-back deal. One commits to a buy price on a certain date and simultaneously commits to sell the bonds back on a future date.
How are the buy and sell back prices determined?
The seller of bonds (repo offer) recognises that she loses the right to the bond coupon for the intermittent period, so she adjusts (in her favour) the buy and sellback prices to recover this lost coupon interest - effectively she mechanically maintains financial benefit of the coupon. But she recognises that she has been loaned cash for the period and owes interest on it so adjusts (adversely to her) the buy and sellback prices to include cash interest payment. You will observe that this negative adjustment is calculated from the repo rate, so the true financing cost is the same as the repo rate.
Hopefully you will observe that you should not be able to arbitrage any profit under this scheme. If you buy bonds in the market, sell them on repo to acquire cash for the purchase then buy them back later under the repo and sell them in the market to release cash, you are back where you started and should not have made an expected profit or a loss. However, the final sale price in this scenario is key and subject to market movement, and therefore even if you sell bonds on repo you maintain the financial exposure, or delta risk, to those bonds.