CFA Level I · CFA Level I Exam · Fixed-Income Issuance and Trading
Compared with a repo agreement backed by high-quality government bonds, a repo backed by lower-quality, less liquid collateral will most likely carry:
Riskier, less liquid collateral most likely brings a higher repo rate and a larger haircut. The lender faces greater possible loss and liquidation difficulty if the borrower defaults, so it asks for more cushion and more interest compensation.
- Aa lower repo rate and a smaller haircut
- Ba higher repo rate and a larger haircutCorrect
- Ca lower repo rate and a larger haircut
Explanation
Lower-quality or less liquid collateral exposes the lender to greater risk of loss if the borrower defaults and the collateral must be sold. The lender compensates by demanding a larger haircut and a higher repo rate. Option A and C imply lower compensation for higher risk.
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