What happens when a coupon is paid on bond collateral during the term of a sell/buy-back?
A) Nothing
B) A margin call is triggered on the seller
C) A manufactured payment is made to the seller
D) The equivalent value plus reinvestment income is deducted from the repurchase price

Question

Quizplus · Accepted Answer

When a coupon is paid on bond collateral during the term of a sell/buy-back, the equivalent value plus reinvestment income is deducted from the repurchase price. This is because the seller has effectively "sold" the bond to the buyer for the duration of the sell/buy-back, so any coupons paid during that time are the property of the buyer. To account for this, the repurchase price is reduced by the value of the coupon plus the interest it would have earned if reinvested.

What Happens When a Coupon Is Paid on Bond Collateral