Fixed Income Doubt

chirag.gada
Posts: 3
Joined: Mon Apr 02, 2012 7:59 pm

Fixed Income Doubt

Postby chirag.gada » Mon Apr 02, 2012 8:04 pm

Hello everyone,

I was going through the course material, and came across these 2 terms:
1. Zero Coupon Bonds
2. Repurchase Agreement

In both cases:
a. the institution issue securities, and
b. the redemption value is higher then the issued amount.

then what exactly is the difference between these 2?

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Fixed Income Doubt

Postby content.pristine » Wed Apr 11, 2012 4:46 pm

Hi Chirag,

Zero Coupon Bonds and Repurchase Agreements are two completely different concepts.
Let me take them up one at a time.

Zero Coupons
They are bonds issued by companies to generate cash.

Repurchase Agreement
Here, imagine you want to borrow some money, like $1 M for example, for a short period of time, say a week. Say you have a bond also worth around $1M.
You have 2 options to do so:
1) Borrowing $1M directly from the market by issuing a short term bond yourself
2) Borrow $1M by taking a loan from some other party and giving them the bond as collateral. Since the other party has the bond as collateral, this loan would be issued with a comparatively lower interest rate.
The second situation here refers to a Repurchase Agreement.
In a repurchase agreement, you agree to sell the bond at a certain price(usually market price), and buy it back at a higher predetermined price. The difference between these two prices is the interest on the loan.

I hope this helps 8-)


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