Suppose that the term structure is flat at 2% (Treasury yield, APR compounded semi-annually).

Consider the following two investment strategies.

(i) You invest $100 to purchase a 10-year treasury note with 2% annual coupon rate paid semi-annually.

(ii) You invest $100 net as follows. First, you invest $1,000 to purchase the same 10-year treasury note. You are able torepo the Treasuries with a 10% haircut to borrow $900. The repo rate for your $900 loan is 2.1%.

Question: How much would the repo counter-party stand to lose if rates rose and you defaulted? Or is it not possible that the counter party will lose?