Suppose the repo rate is 4.15%, and the margin requirement (haircut) for a 3-day repo is 2% (i.e. collateral = 102% of money). You want to buy $100m of 10-year Treasuries and sell it 3 days later, using a repo to finance your purchase.

a) How much of the purchase price can you borrow by repoing out the Treasury bond? What is the leverage ratio?

b) How much interest will you have to pay when repurchasing?

c) At the next day’s yield the bonds are worth $100,317,804. (The current 10-yr benchmark security has a coupon of 4.25%, and the yield fell from 4.79% to 4.75%, causing that price change.) What was your total net profit or loss? (Assume the bond paid no coupons during the 3 days.) What was your annualized return? (Hint: think about what was your initial investment.)

d) What overnight yield change would have just wiped out the haircut?