For leverage, if the borrower offer securities with higher yields as collateral, would that reduce the repo rate or increase?
good question.
High yields is not something we’ve been asked before… But I would say that high yields is a benefit to the collateral holder resulting in lower repo rate, however high yields something you would relate with lower credit rating which would mean higher repo rate…
I don’t know the answer but i suspect it’s unclear if the repo rate would be higher or lower and it would depend on other factors like scarcity or term etc…
I think you’ve addressed the main points.
If I were asked the question on an exam, I would say it increases the repo rate because the bonds are likely riskier.
Higher return comes at higher risk, generally.
I think you’ve addressed the main points.
If I were asked the question on an exam, I would say it increases the repo rate because the bonds are likely riskier.
Higher return comes with higher risk, generally.
I’m in agreement with dwheats on this. Repo rate is largely determined by the riskiness of the situation to the lender. Higher yielding security (e.g. a corporate as opposed to a treasury) implies more risk to the lender holding the collateral.
the yield that colleteral earns goes to borrower… correct?
it purely depends on how is the quality and demand of colleteral… Correct?
Lender is the provider of cash. Borrower is the provider of security. The repo agreement is an outright sale of the collateral with a promise to repurchase at a later date. If you ‘lend’ cash and take the security into your posession then you also collect the yield.
The repo rate depend on quality, demand for collateral and term.
p.s. i agree with the guys above saying that the repo rate would be high if the yield was higher.
got it… forgot that its a repurchase and kept thinking of it as loan…
Thanks for this thread.