If a particular sovereign bond has a haircut of 3% and a collateral call of $500,000 is made, only 97% of the collaterals value is credited for collateral purposes.

That is, in order to satisfy a $500,000 collateral call, $515,464 ($\frac{500,000}{0.97}$) of the sovereign bond must be posted.

Things to Remember

• Haircut: Haircut is the percentage reduction in the value of an asset accepted as collateral. It is used to protect the lender in case the value of the asset falls.
• Collateral Call: A collateral call is a demand made by a lender or a counterparty for additional collateral to be posted in order to meet margin requirements or to cover potential losses.
• Collateral Value: The value of the asset posted as collateral, which is used to determine the amount of credit that can be extended or the amount of a collateral call.