Timeline for why the financing cost of a bond is repo?
Current License: CC BY-SA 4.0
6 events
| when toggle format | what | by | license | comment | |
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| Aug 5, 2018 at 13:19 | comment | added | Attack68♦ | Probability of default is factored into the price of the bond as an investment. A repo is a committed collateralised buy and sell back, so if the bond defaults the buy/sell prices are still honoured and therefore the default only affects the underlying holder of the asset, but is not a consideration of the repo. Indirectly, it is a concern because the market value of a defaulted bond will decline considerably reducing its effect as worthwhile collateral. Hence the haircut of bonds which have potentially higher volatility is necessarily higher as effective insurance. | |
| Aug 5, 2018 at 12:59 | comment | added | Jiem | Hi @Attack68, let say I sold the bond for 100€, the bonds is intended to pay a 5€ coupon during the repo period. Hence the buy-back price should be 95€ to compensate the lost coupon. But what if the default occurred before the coupon payment ? Let say the recovery is 50€. So If I have kept the bond I would lost 50€. But in the repo transaction I lost only 45€. My question is how the buy-back price is calibrated to avoid such situation ? | |
| Jul 7, 2018 at 6:23 | vote | accept | Peaceful | ||
| Jul 7, 2018 at 6:10 | comment | added | Peaceful | was string to accept it but could not find a button to do so... I am new to this system but would think it should be more apparent... | |
| Jun 29, 2018 at 17:32 | comment | added | Attack68♦ | @PeacePanda helpful to accept the answer if you believe it to be satisfactory. Usually I wait to see if anymore answers come in on my own questions but looks like this question is now exhausted.. | |
| Jun 28, 2018 at 10:47 | history | answered | Attack68♦ | CC BY-SA 4.0 |