The Repo Market Lecture - Debt Instruments and Markets...

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Debt Instruments and Markets Professor Carpenter The Repo Market 1 The Repo Market Outline Repurchase Agreements (Repos) The Repo Market Uses of Repos in Practice Buzzwords Repo, Reverse repo, Repo rates, Collateral, Margin, Haircut, Matched book, Special Outline and Readings Suggested reading Veronesi, Chapter 1 Tuckman, Chapter 15 Pozsar, et al., Shadow Banking
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Debt Instruments and Markets Professor Carpenter The Repo Market 2 Repos We often talk about buying and shorting securities. In the fixed income market, these transactions are accomplished with the use of the repo market . A repurchase agreement , or repo , is a sale of securities for cash with a commitment to repurchase them at a specified price at a future date. Practically, the repurchase agreement by itself is simply a collateralized loan . Repo Diagram Dealer Counterparty Borrow money Pay back money + interest at repo rate Lend securities (collateral) Take back securities Settlement date End of term
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Debt Instruments and Markets Professor Carpenter The Repo Market 3 Example Dealer repos $30 million par of a Treasury bond to a municipality for 51 days. The market value of the collateral is $31,228,715. The municipality takes a 2% haircut, lending 98% of the market value, or $30,604,140.70 at a repo rate of 5.25%. After 51 days, the municipality returns the $30 million bonds, and the dealer repays $30,604,140.70 (1+0.0525 x 51/360) = $30,831,759. Note that repo rates are simple interest rates that use an actual/360 calendar (in the U.S.--some other countries use actual/365). Reverse Repo A reverse repo transaction is essentially just the other side of a repo transaction. However, the labels are determined from the dealer's viewpoint, so if the dealer borrows money, it's a repo if the dealer lends money, it's a reverse repo.
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