Suppose that the term structure is flat at 2% (Treasury yield, APR compounded semi-annually). Consider the following
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Question:
Suppose that the term structure is flat at 2% (Treasury yield, APR compounded semi-annually).
Consider the following two investment strategies.
(i) You invest $100 to purchase a 10-year treasury note with 2% annual coupon rate paid semi-annually.
(ii) You invest $100 net as follows. First, you invest $1,000 to purchase the same 10-year treasury note. You are able torepo the Treasuries with a 10% haircut to borrow $900. The repo rate for your $900 loan is 2.1%.
Question: How much would the repo counter-party stand to lose if rates rose and you defaulted? Or is it not possible that the counter party will lose?
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston
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