Module 7 · Advanced
Repo & financing
How does a hedge fund buy $1 billion of Treasuries with a fraction of the cash? The repo market. A repo (“sale and repurchase”) is a short-term loan secured by a bond: you sell the bond for cash today and agree to buy it back tomorrow at a slightly higher price — the difference is the repo rate (interest).
You only have to post the haircut — a small % of the value — as your own cash; the rest is borrowed. A 2% haircut means 50× leverage. You collect the bond's coupon but pay the repo rate on the borrowed money; the gap is your carry. When financing is cheap and carry is positive, leverage magnifies the return — and, of course, the losses.
🎛 Repo calculator
Cash you post
$198,000
Financed (borrowed)
$9,702,000
Leverage
50×
Repo interest
$28,298
Return on your posted cash (annualized): +53.4%
In a repo you sell a bond and agree to buy it back later — really a secured loan against the bond. You only post the haircut as cash, so a 2% haircut is 50× leverage. You earn the bond's coupon but pay the repo rate on what you borrowed — the difference is your carry. Cheap financing + positive carry is how leveraged bond investors juice returns (and amplify losses). Educational tool — not investment advice.
Things to try
- • Drop the haircut from 5% to 1% — leverage and return-on-cash explode (so would a loss).
- • Push the repo rate above the coupon — carry turns negative; you're paying to hold the bond.
- • Extend the holding period and watch financing cost accumulate.