3 Suppose a dealer bank is considering buying $50,000,000 of bonds and it wants to borrow as much as possible using an overnight repurchase agreement (repo).

(a ) Suppose the Haircut (HC) on the bonds is currently 0.01 (1%). By pledging the $50,000,000 of bonds as collateral how much could the dealer bank borrow? How much of its own cash would the dealer bank have to contribute to buy the bonds?

(b ) Briefly explain how the dealer bank can rollover (ie renew) the overnight repo agreement and finance the bonds using borrowed money for a year. Why might this be a profitable action for the dealer bank?

(c ) Suppose the repo agreement has been renewed for many days. Now repo cash lenders demand a 0.04 (4%) haircut (HC) on the bonds in order to renew the repo agreement the next day. How much cash will the repo cash lenders now be willing to lend to the dealer bank, beginning the next day, when accepting the entire $50,000,000 of bonds as collateral?

(d ) What would lead repo cash lenders to require a higher haircut? Briefly explain.