Calculations involved in Repo and Reverse Repo

A repo transaction involves two legs of calculation. The first one is when cash and securities are borrowed and the second one is when they are returned at the end of the term.

If a security pays a coupon during the term of the repo, the coupon should be appropriately distributed between the two parties because the lender of the securities held them all these days and deserves the major portion of it.

Considering the above fact the settlement amount on the first leg involves the following two components.

Value of the securities at the transaction price.
Accrued interest from the previous coupon date to the date on which the transaction is initiated.

The second leg involves the following three components.

Repo interest for the term of the repo.
Accrued interest from the previous coupon date to the end of repo term.
Return of principal amount borrowed.

Let us take a numerical example

Trade date: 20th July 2004

Trade price: Rs1008.50

Face Value: Rs1,00,00,000 (10,000 bonds with a face value of Rs 1000 each)

Security: 12.5% interest rate bond

Last Coupon Date: 1^st -July-2008

Repo rate: 7.5%

Repo term: 2 days

First leg:

On 20th the seller of the repo (borrower of funds) receives the following sum:

Value of the security: 1008.50*10000 = 1,00,85,000

Accrued interest: 12.5 * 1,00,00,000 * 19 /360 * 100 = 65,972.22

Settlement amount: 1,00,85,000 + 65,972.22 = 1,01,50,972.22

Second leg:

On 22nd July the seller returns the following amount (repo period is two days):

Original borrowing: Rs 1,00,85,000

Accrued interest: 12.5 * 1,00,00,000 * 21 /360 * 100 = 72,916.66

Repo interest: 7.5 * 1,00,00,000 * 2/360 * 100 = 4166.66

Amount to be returned: Rs 1,00,85,000 + 6944.44 + 4166.66 = Rs 10096111.1

July 19, 2008 | Filed Under Bonds

Comments

3 Responses to “Calculations involved in Repo and Reverse Repo”

Maximiliano Ferrero on March 11th, 2009 9:48 pm

Hello,
Thanks much for the information provided.
Regarding the calculation of the Repo interest, should it be calculated from the Trade date (as per your example) or from the settlement date of the Repo (informed in the broker statement).
I would very much appreciate if you could provide me with some guidance on this.
Kind regards,
Maxi
Satyam on March 15th, 2009 2:56 pm

Hello Maxi,

Repo interest is calculated for the repo term. In the example it’s 2 days.
tin on March 27th, 2009 1:13 pm

you’ve made a typo