CFA Level I · CFA Level I Exam · Fixed-Income Issuance and Trading
A cash lender extends an overnight repo against collateral with a market value of 5,250,000 and requires a haircut of 5% applied to the collateral value. The cash amount lent is closest to:
The cash lent is about 4,987,500. A 5% haircut means the lender advances only 95% of the collateral's market value, so 5,250,000 times 0.95 gives the loan. Dividing by 1.05 or adding the haircut misapplies it.
- A4,987,500Correct
- B5,000,000
- C5,512,500
Explanation
With a haircut applied to collateral value, cash lent = 5,250,000 × (1 − 0.05) = 4,987,500. The 5,000,000 figure divides by 1.05, which treats the haircut as a markup on the loan, and 5,512,500 adds the haircut to the collateral.
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