fun repo rate question default, directly, question, quality

transferpricing

"Repo rate is directly related to maturity of repo, inversely related to quality of collateral, and directly related to the maturity of the collateral. US Tbills are often purchased by Treasury dealers using repo transactions, and since they have high liquidity, short maturities, and no default risk, the repo rate is usually quite low."

"The greater the control the lender has over the collateral, the lower the repo rate. If the availability of the collateral is limited, the repo rate will be higher"

a. 1 is correct
b. 2 is correct
c. 1 is incorrect 2 is correct
d. neither is correct

bpdulog

"and directly related to the maturity of the collateral? "

Are they related?

pennyless

D
Maturity of collateral already taken into account via quality.

If collateral hot rate is cheaper.



Edited 1 time(s). Last edit at Saturday, May 28, 2011 at 06:09PM by Paraguay.

ohai

SO what is the answer SKIPP , its 1 am and i want to sleeeppp

justin88

1am? you in Turkey or sometrhing?


Answer was D.

Although maturity of collateral is considered in determining the quality of collateral, it does not act as a separate factor in determining repo rate.

If availability of collateral is limited, repo rate will be lower, not higher. Limited availability makes collateral more valuable due to scarcity (ie callable bonds, long maturity bullets)

thommo77

i think you are referring to maturity of REPO.. the question says maturity of COLLATERAL(ie a 1 yr bond as collateral versus a 10 yr bond)

lcai

Not to get into too much industry but the term of the collateral will affect the amount that you can borrow not the interest rate.

There will be a higher margin to the lender i.e. only loaning 90% of face.

mar350

DD87 Wrote:
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> LEBANON...
>
>
> Thx for the post


dude i was just there. in beirut. awesome city.

schweser gives rational on pg 232 practice exam book 2 exam 1 afternoon question 13.2C

Unforseen

Yeah Awesome for a vacation ONLYYYY.

Roflnadal

oh never mind i thought 1 was
The greater the control the lender has over the collateral, the lower the repo rate
with 2 being
If the availability of the collateral is limited, the repo rate will be higher"