As a junior trader at your investment bank, you quickly and cost-effectively need to fund overnight a $100m position in the on-the-run 5Y UST note. On Feb 17, 2014, this note, which pays a 3% coupon and matures on 03/21/2019, is quoted at a bid-ask of 100 21/32-22/32 (careful: what does the quote convention mean?).

(a) What should the invoice price of this note be? In your computation of accrued interest, please note that February is an odd month.

(b) The general-collateral repo rates rates are 1.10%-1.25% (dealer pays-earns interest) on 02/17/14. If the market required a 2% margin, how much of the purchase price could you have borrowed in the repo market, and how much interest would you have paid for a one-day loan? What would have your equity stake in the position be?

(c) At the expiration of the 1D repo (next day), the bond is trading at 100 22/32-23/32 (careful: what does the quote convention mean?). What is your total profit or loss if you were to close out your position?

(d) As an alternative, you consider an overnight loan in the fed funds market. What are fed funds rates and how do they relate to repo rates? Explain.

(e) What are fails in the repo market? Describe two strategies to take advantage of fails and to what purpose unscrupulous market participants would use them.