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Explanation:
Cash inflow at the beginning of the repo.
This is the bond's adjusted price (including the fraction of the coupon) minus the haircut.
Initial Cash Inflow = (Current price of bond + Fraction of Coupon) × Notional × (1 − Repo haircut)
=
= $9,529,375$
Cash outflows at the end of the repo.
This is the initial cash inflow plus the repo interest for the 6-month period.
Cash Outflow at the End = Initial Cash Inflow ×
= $9,529,375 \times (1 + 0.02 \times 0.5)9`,624,668.75$
The anticipated cash outflow for ABC Bank when the repo contract expires in 6 months is GBP 9,624,668.75.
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Q.5412 Three months after purchasing the bond on its coupon payment date, ABC Bank opts to enter into a repurchase agreement (repo) on the bond to generate immediate liquidity. The bond’s and repo’s details are shown below.
| Notional (GBP) | 10,000,000 |
|---|---|
| Annual coupon (paid semiannually) | 3.5% |
| Current price of bond (GBP) | 97 |
| Repo interest rate | 2% |
| Repo haircut | 3.5% |
What is the anticipated cash outflow for ABC Bank when the repo contract reaches its expiration in 6 months?
A
9,539,387
B
9,624,669
C
9,949,300
D
9,273,864