Borrowing funds to purchase bonds, Financial Management

Assignment Help:

Borrowing Funds to Purchase Bonds

There are several sources available to borrow funds. When securities are purchased with borrowed funds then the most common practice is to use the securities as collateral for the loan. In such a case, the transaction is referred to as a collateralized loan. The most common collateralized borrowing arrangements used by the investors are:

Margin Buying

In this kind of arrangement, the broker provides funds to buy the securities and he gets the money form banks. The interest rate the banks charge to the broker for these transactions is known as the call money rate or broker loan rate. The broker charges the investor the call money rate plus service charge.

Repurchase Agreement

This is an agreement sale to a security with the commitment that the seller will buy back the same security from the purchaser at a pre-specified price and date. The price and date at which the seller purchases the security are known as the repurchase price and repurchase date respectively. The implied interest rate is also known as repo rate. When the term of the loan is one day, it is called an overnight repo, and when the loan period is more than one day, it is called a term repo.


Related Discussions:- Borrowing funds to purchase bonds

Arbitrage-free valuation approach, The main drawback of the tradition...

The main drawback of the tradition approach of valuation is that it discounts every cash flow using the same discount rate. For example, let us take 5-year (7.00 per ce

What are the reasons why organisations grow, What are the Reasons why organ...

What are the Reasons why organisations grow Required to provide higher financial returns to investors e.g. increases the wealth of shareholders Possible to achieve econ

Duration and convexity of mortgage backed security, Duration an...

Duration and Convexity of MBS A graph decpicting the price of the security under study and the interest rates helps in assessing the duratio

Future value of money, john has two options from which to choose one: (a)E...

john has two options from which to choose one: (a)Either to pay shs24m for the motor vehicle now . OR (b)To pay for the car in four equal regular installments of shs7m ea

Introduction to mortgage-backed securities, A mortgage may be defined as a ...

A mortgage may be defined as a pledge of property to secure payment of a debt. Depending upon the terms of mortgage agreed upon between the lender and the borrower, mor

Option adjusted spread, The formula explained in the above paragraph ...

The formula explained in the above paragraph enables the investor to compute the value of a bond with an embedded option as the difference between the value of an

What do you mean by present value of a future sum, Q. What do you mean by P...

Q. What do you mean by Present Value of a Future Sum? The present value of a future sum will be worth less than the future sum because one foregoes the opportunity to invest an

Types of mutual funds, Types of Mutual Funds The objectives of a Mutual...

Types of Mutual Funds The objectives of a Mutual Fund are as follows: To provide an opportunity for lower income groups to acquire property without much difficulty in the

Calculate the new interest rate and excel function pv, I want to see the so...

I want to see the solution that was provided in Feb 2013 for Calculate the new interest rate and excel function pv, Financial Accounting

Tests in investments, Tests in Investments There are many rules that sp...

Tests in Investments There are many rules that specify how the past data of share prices can be used to obtain a clue regarding the future prices of shares. Such rules would be

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd