Calculations involved in Repo and Reverse Repo

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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 2008

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: 1st -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

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{ 13 comments… read them below or add one }

Maximiliano Ferrero March 11, 2009 at 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

Reply

Satyam March 15, 2009 at 2:56 pm

Hello Maxi,

Repo interest is calculated for the repo term. In the example it’s 2 days.

Reply

tin March 27, 2009 at 1:13 pm

you’ve made a typo

Reply

Ed July 1, 2011 at 1:12 pm

On the second leg in the amount to be returned where is the amount 6944.44 coming from

Reply

Sathish Emmadi July 1, 2011 at 2:10 pm

Hi Ed,

6944.44 is the difference in accrued interest i.e.(72916.66 – 65972.22).

This 6944.44 is the interest accrued in the repo period (2 days).

Reply

jigar July 5, 2011 at 6:01 am

i want to knw ..in first leg the calculation of interest accrued tne no. of days taken is 19…n same as in second leg as 22…so how it came….n wat is meant by coupan date?…

Reply

Sathish Emmadi July 5, 2011 at 1:12 pm

Hi Jigar,

Coupon date is interest payment date. If you buy a government bond, for example, you will receive interest every six months on a predetermined date.

Regarding your accrued interest question: When the bonds are kept as collateral the total number of days passed from last coupon date is 19 days (from July1st to July 20th). When the bonds are returned on 22nd the total days are 21 days from last coupon date.

Please refer to the below article for accrued interest details. Please read other fixed income articles as well to get an idea on bonds market.

http://lastbull.com/accrued-interest-of-a-bond/

Reply

Vinay Poddar August 29, 2011 at 5:03 am

Correct Amount to be returned = 10150972.22+6944.44+4166.66=10162083.1
How can leg2 amount be less than leg1 amount ?

Reply

waqz September 10, 2011 at 6:34 pm

Thnx for solving the exemple. it really helped me.

Reply

Jonny Ho October 18, 2011 at 7:09 am

Hi, I want to know how we monitored the Top Up if the collateral is dropped from its initial value.
Should this repo be marked to-market? and how?

thanks for your time.
Regards

Reply

Vidhya December 27, 2011 at 6:02 am

Could you solve this problem. The answer is contradicting for me if I proceed your way.
To find the forward leg consideration for security 11.5% 2012 for settlement date of 25th August 2003 & Maturity date of 14th December 2012 with market price of Rs.133. repo rate 8% p.a. and Repo term of 5 days. Answer is 135.4163. But I am getting 132.9897 as answer. could you clarify?

Reply

Saurabh June 7, 2012 at 5:52 pm

Hi,

Shouldn’t the Repo Amount be calculated on the borrowed amount i.e. Rs 1,00,85,000 instead of the total face value of securities i.e. Rs1,00,00,000?

Thanks…

Reply

sawan August 14, 2012 at 10:40 pm

I agree with Saurbah. Repo Amount should be calculated on the borrowed amount i.e. Rs 1,00,85,000 instead of the total face value of securities i.e. Rs1,00,00,000…

What do you say Satish?

Reply

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