"Fixed Income": re-purchase agreement
In a repurchase agreement, the repo margin will be lower the:
A、 higher the supply of the collateral.
B 、higher the quality of the collateral.
C、 lower the demand for the collateral.
Which of the following is most likely a form of internal credit enhancement?
A、 Letter of credit
B 、Surety bond
B is correct. The higher the quality of the collateral, the lower the difference between the market value of the security used as collateral and the value of the loan—that is, the repo margin.
A is incorrect because a higher supply of collateral would result in a higher repo margin.
C is incorrect because a lower demand for the collateral would result in a higher repo margin.
C is correct. Overcollateralization is a form of internal credit enhancement in which more collateral is posted than is needed to obtain or secure financing. It provides an additional credit buffer in the event of default by providing more assets to repay the lender.
A is incorrect because a letter of credit is a credit line provided by a financial institution to reimburse any cash flow shortfalls from the assets backing the issue.
B is incorrect because a surety bond is a guarantee issued by a rated and regulated insurance company to reimburse investors for any losses incurred if the issuer defaults.