Question
Carter Bank is thinking about making a $1,000 loan via purchasing or taking a long position on a 3-year bond with an annual coupon rate
Carter Bank is thinking about making a $1,000 loan via purchasing or taking a long position on a 3-year bond with an annual coupon rate of 8%.
m. Explain what it means for a haircut to be included in the repo rate. n. Alternatively, Carter Bank could enter into a 2-year swap agreement, with annual payments based upon a notional principal of $1,000. The swaps payments are computed as a synthetic combination of a long call option and a short put option with identical strike prices, where rSTRIKE=4%. Draw the synthetic position associated with the swap agreement. o. Based upon your answers in parts k through n, should Carter enter into the repo agreement or attempt to enter into a swap agreement for 4%? Explain.
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