CFA Level I · CFA Level I Exam · Fixed-Income Issuance and Trading
Compared with a repo with a high-quality government bond as collateral, a repo against a lower-quality, less liquid corporate bond is most likely to have:
Repo against lower-quality, less liquid collateral most likely carries a higher repo rate and a larger haircut. The cash lender faces greater collateral price and liquidity risk, so it requires more overcollateralization and a higher return than for high-quality government bonds.
- Aa higher repo rate and a larger haircut.Correct
- Ba lower repo rate and a larger haircut.
- Ca lower repo rate and a smaller haircut.
Explanation
Riskier or less liquid collateral exposes the cash lender to greater credit and price risk, so the lender demands more protection through a larger haircut and compensation through a higher repo rate. The other options imply lower protection for riskier collateral.
Did you get it right without looking?
One question tells you little. A timed set on Fixed-Income Issuance and Trading shows your real accuracy, how long you take and where you lose marks.
More Fixed-Income Issuance and Trading questions
- A corporate treasurer needs short-term funding of three months and wants to borrow in the wholesale market without pledging specific assets,…
- 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 coll…
- Compared with a quote-driven dealer market, an order-driven electronic trading system for bonds is most likely to:
- Which of the following best describes how most corporate bonds are traded in the secondary market?
- An investor compares a Eurobond issued by a Brazilian company, denominated in euros and sold to investors across several countries, with a f…
- In a repurchase agreement, the party that sells the security and agrees to buy it back at a higher price on a later date is most likely desc…