If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral,the "haircut" is
A)5%.
B)10%.
C)20%.
D)50%.

Question

Quizplus · Accepted Answer

The haircut is calculated as the difference between the loan amount and collateral value, divided by the collateral value. In this case, the haircut is:
($200 million - $220 million) / $220 million = -0.0909 or -9.09%
However, haircuts are typically expressed as a percentage of the collateral value. So, the absolute value of the calculated haircut (-9.09%) is used, which is rounded up to the nearest 5% increment. Therefore, the haircut is 10%. Hence, the correct answer is B.

If a Borrower Takes Out a $200 Million Loan in a Repo