CFA Level I Exam · Fixed-Income Issuance and Trading

Repo, Haircut and Commercial Paper for CFA Level I

Updated 7 October 2026 · Fact-checked

A repo is a short-term secured loan: one party sells a security and agrees to buy it back later at a higher price. The price difference gives the repo rate. A haircut sets the loan below collateral value. Commercial paper is short-term unsecured corporate debt sold at a discount. Solve questions by identifying who lends, who borrows, and what collateral covers.

Understand Short-Term Funding: Repo and Commercial Paper

Corporates and financial institutions need cash for short periods. They have several options. A bank line of credit is one. Commercial paper is another. Repurchase agreements are a third, used mainly by dealers and financial firms.

Commercial paper (CP) is short-term, unsecured debt issued by large, creditworthy corporations and financial institutions. It is usually issued at a discount to face value and repaid at face value at maturity. It is a money market instrument with short maturities, often well under a year. Because it is unsecured, it depends on the issuer's credit quality. Issuers often back it with a bank line of credit to cover the risk that they cannot roll it over. CP is typically issued through dealers or sold directly by the issuer. A certificate of deposit (CD) differs: it is a deposit instrument issued by a bank, while CP is a corporate or financial firm's promissory note. Both are money market instruments.

A repurchase agreement (repo) is a sale of a security with a commitment to buy it back at a set price on a set future date. Economically it is a collateralized loan. The seller of the security is the borrower of cash. The buyer is the lender of cash. The security is the collateral. The difference between the repurchase price and the sale price is the interest. The annualized rate on that interest is the repo rate.

A reverse repo is the same trade seen from the cash lender's side. The party that buys the security and lends cash is doing a reverse repo. So one trade is a repo for the borrower and a reverse repo for the lender. Do not treat them as two different trades.

The haircut (or margin) protects the lender. The lender advances less cash than the collateral's market value. For example, with a 5% haircut, the loan is 95% of collateral value. A riskier or more volatile security gets a bigger haircut. A higher haircut means the borrower must fund more of the position itself, so it lowers leverage. Repo rates are generally lower than unsecured rates because the loan is collateralized. Repo can be overnight or term. If collateral value falls, the lender may call for more margin.

Key formulas to remember

Repurchase price: Repurchase price = Sale price × (1 + repo rate × days ÷ 360); Uses simple interest. Use the day-count the question gives (commonly 360 for USD).
Repo interest: Interest = Repurchase price − Sale price; This is what the cash borrower pays the cash lender.
Repo rate from prices: Repo rate = (Repurchase price ÷ Sale price − 1) × (360 ÷ days); Annualized simple rate.
Loan amount with haircut: Loan = Collateral market value × (1 − haircut); Haircut is a percentage of collateral value, not of the loan.
Haircut from loan: Haircut = (Collateral value − Loan) ÷ Collateral value; Equivalent to 1 − loan ÷ collateral.
Commercial paper discount price: Price = Face value × (1 − discount rate × days ÷ 360); Discount rate is quoted on face value. Actual yield on price is higher than the discount rate.

How to solve Short-Term Funding: Repo and Commercial Paper questions

Use this order for any repo, haircut or commercial paper question.

1Identify the instrument: repo, reverse repo, commercial paper or CD.
2Identify who is the cash borrower and who is the cash lender. The seller of the security in a repo is the borrower.
3If a haircut is given, compute the loan as collateral value × (1 − haircut). Do not apply it to the loan.
4Find the day-count and the number of days. Use the convention stated in the question.
5Apply simple interest: interest = cash amount × rate × days ÷ 360.
6Compute the repurchase price (cash lent plus interest) or the repo rate, as asked.
7Check direction: repo means borrowing cash, reverse repo means lending cash.
8Eliminate options that reverse a sign, use the wrong base, or mix up repo and reverse repo.

Quickest way: Role-first shortcut

When to use it: Use for conceptual repo questions and for fast numerical checks.

Ask first: who gets the cash? That party is doing the repo and is the seller of the collateral.
Remember: lender = reverse repo = receives collateral and earns the repo rate.
For haircut, multiply collateral value by (1 − haircut) to get the cash. Bigger haircut means less cash.
For interest, use cash × rate × days ÷ 360. Add it to the cash for the repurchase price.
Of three options, drop the one that uses the full collateral value as the loan, then check the rest.

Common mistakes in Short-Term Funding: Repo and Commercial Paper

Treating repo and reverse repo as different trades.
The names suggest two products.
Fix: Remember they are one trade. The cash borrower does a repo. The cash lender does a reverse repo.
Applying the haircut to the loan instead of to collateral value.
Students think of a haircut as a discount on what is lent.
Fix: Loan = collateral value × (1 − haircut). The haircut is a share of collateral value.
Thinking a higher haircut means more leverage.
The word suggests a bigger deal.
Fix: A higher haircut means the borrower gets less cash per unit of collateral, so leverage falls.
Calling commercial paper secured or interest-bearing.
It is confused with repo or bonds.
Fix: CP is unsecured and normally sold at a discount to face value.
Confusing commercial paper with a certificate of deposit.
Both are money market instruments.
Fix: CP is issued by corporates and financial firms. A CD is a deposit issued by a bank.
Ignoring the day-count in the repurchase price.
Annual rates are used straight away.
Fix: Multiply the rate by days ÷ 360 (or as stated) before computing interest.

Worked examples

Example 1

A dealer enters a 30-day repo, selling a bond with a market value of USD 10,000,000 and a 4% haircut. The repo rate is 3.60% (360-day year). What is the repurchase price? Options: A. USD 9,600,000 B. USD 9,628,800 C. USD 10,030,000

Show the solution

Loan = 10,000,000 × (1 − 0.04) = 9,600,000.
Interest = 9,600,000 × 0.036 × 30 ÷ 360 = 28,800.
Repurchase price = 9,600,000 + 28,800 = 9,628,800.
Option A is the loan only. Option C applies interest to full collateral value.

Answer: B. USD 9,628,800

Example 2

A corporation issues 90-day commercial paper with face value EUR 5,000,000 at a discount rate of 2.40% (360-day year). What is the issue price? Options: A. EUR 4,970,000 B. EUR 4,985,000 C. EUR 5,030,000

Show the solution

Discount = 5,000,000 × 0.024 × 90 ÷ 360 = 30,000.
Price = 5,000,000 − 30,000 = 4,970,000.
Option B uses a 45-day period. Option C adds the discount instead of subtracting it.

Answer: A. EUR 4,970,000

Exam tips

Name the cash borrower first. It fixes who does the repo and who does the reverse repo.
Haircut questions usually test the loan amount. Multiply collateral value by (1 − haircut).
Repo is secured, CP is unsecured. Questions often test credit risk and why repo rates are lower.
Watch the day-count. Use the convention stated and keep simple interest for short terms.
In conceptual questions, a lower haircut or higher collateral quality means cheaper funding.

Practice questions from Fixed-Income Issuance and Trading

Short-Term Funding: Repo and Commercial Paper in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Short-Term Funding: Repo and Commercial Paper: frequently asked questions

What is the difference between repo and reverse repo?

They are the same transaction seen from opposite sides. The party selling the security and borrowing cash is doing a repo. The party buying the security and lending cash is doing a reverse repo.

How does a haircut work in a repo?

The lender advances less cash than the collateral's market value. The loan equals collateral value × (1 − haircut). The gap protects the lender if the collateral falls in value.

What is the difference between commercial paper and a certificate of deposit?

Commercial paper is unsecured short-term debt issued by corporations or financial firms, usually at a discount. A certificate of deposit is a deposit instrument issued by a bank. Both are money market instruments.

Why is the repo rate usually lower than unsecured borrowing rates?

The loan is backed by collateral, so the lender bears less credit risk. Lower risk usually means a lower rate. Better collateral and a higher haircut also support a lower rate.