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Describe the balance sheet of the bank Now the bank enters into a repurchase agreement where it sells the government bond to an investor with an agreement to buy it back at a later date If the

  1. Describe the balance sheet of the bank.
  2. Now the bank enters into a repurchase agreement where it sells the government

bond to an investor with an agreement to buy it back at a later date. If the
haircut on the government bond is 2%, how much is the bank borrowing?

  1. Suppose the bank uses the borrowed money to buy another government bond and

again enters into another repo to borrow. How much does the bank borrow now?
(Haircuts on government bonds keep being 2%.)

  1. If the bank repeats the process described in (c) over and over again (ad infinitum),

what is the maximum amount the bank will be able to borrow in total? You need
to sum all the amounts the bank borrows from each repo transaction: it is an
infinite sum.

 

May 24 2020 View more View Less

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