Timeline for why the financing cost of a bond is repo?
Current License: CC BY-SA 4.0
11 events
| when toggle format | what | by | license | comment | |
|---|---|---|---|---|---|
| Jul 7, 2018 at 6:23 | vote | accept | Peaceful | ||
| Jun 28, 2018 at 22:53 | comment | added | Peaceful | thinking it more carefully, indeed, as per the below answer, the dropped coupon would be taken into account in the determination of the repurchase price anyway | |
| Jun 28, 2018 at 22:18 | comment | added | Mehness | I mention risks of the coupon stream because in the structured mkt you also get term repos - i.e term financing of a bond (eg 5y financing). Here obviously the coupon stream on its own and delta that it can generate on its own, is important. | |
| Jun 28, 2018 at 22:04 | comment | added | Mehness | Hi no probs. So, I guess there's the vanilla repo mkt, and more structured mkt, (with some of the margining variations I mentioned to address credit risk etc) - personally traded the latter, but the principles I think are the same. Effectively (as I think per answer below), the borrower is long all risks on the bond, including coupon stream. Bottom line is that the overall economics of the trade (including any asset swaps to swap fixed to float etc) and any cashflows/deal pricing booked between borrower and lender, will be such that borrower retained benefit of the coupon in anything I've seen | |
| Jun 28, 2018 at 21:40 | comment | added | Peaceful | thanks for the comments. I thought it is the cash lender that has the legal entitlement of the bond. i.e., the cash lender would get the dropped coupon if there is one | |
| Jun 28, 2018 at 10:47 | answer | added | Attack68♦ | timeline score: 2 | |
| Jun 28, 2018 at 9:14 | comment | added | Mehness | (and obviously by maturity in previous I meant the repo maturity/term not necessarily the bond maturity!) | |
| Jun 28, 2018 at 8:58 | comment | added | Mehness | Put another way, what ever happens, the borrower has to pay back say 100 at maturity and gets back the bond, whatever its value (even if recovery), so if the borrower doesn't default the lender just gets back the cash they lent. Even any intervening bond coupons go to the borrower, they absolutely do just have a financed long position in the bond | |
| Jun 28, 2018 at 8:45 | comment | added | Mehness | Your comment's basically correct. The borrower bears all the bond risk, and has to post margin should the bond collateral deteriorate vs the cash liability. The lender bears credit risk to the borrower, but collateralisation normally covers this unless borrower and bond are highly correlated and repo term is long (eg 5y repo lending to eg a spanish bank against an SPGB) - in which case higher collateralisation using IA (independent amount) in addition to VM (variation margin) may be entailed | |
| Jun 28, 2018 at 6:02 | comment | added | Peaceful | I got a feeling myself the confusion is coming from the poor understanding of the repo market. probably because cash lender actually has no position in the bond even though keeps the bond during the repo transaction ? it is the cash borrower that is in a long position of the bond as he agrees to buy the bond back with a pre-determined price. | |
| Jun 28, 2018 at 5:56 | history | asked | Peaceful | CC BY-SA 4.0 |