How Repo Funding Affects PAI on Bond Collateral

Summary

The note explains why posting bonds as collateral is treated differently from posting cash when considering price adjustment interest (PAI). A party receiving bonds can generally use them in a repurchase agreement to borrow cash, and the repo rate is the funding cost associated with that borrowing. On this reasoning, a separate PAI rate does not need to be specified for bond collateral in the documentation; the recipient's financing cost arises through repo instead.

The explanation is concise and gives no calculation, market evidence, or discussion of operational details. The ability to repo bonds and the funding terms available can depend on the securities and market circumstances, so the answer should be read as a general convention rather than a universal rule for every collateral agreement. It does not address cases where bonds cannot readily be pledged or where collateral documentation provides for a different treatment.

Key ideas

• A recipient of bond collateral may raise cash by pledging the bonds in the repo market.
• The repo rate represents the funding cost of that cash borrowing.
• The answer therefore says bond collateral generally does not require a separately specified PAI rate.
• The explanation does not discuss exceptions or agreement-specific terms.

Tags

# Price Adjustment Interest (PAI) for collateral Bond


# Price Adjustment Interest (PAI) for collateral Bond












I understand that, if cash is put as collateral, the party holding the collateral needs to pay the counter party the funding cost of the cash collateral (PAI). How about if bonds are put as collateral? what is PAI in this case and what is the reason?

## Answer by dm63 (score 2)

https://quant.stackexchange.com/a/68730

If bonds are given as collateral, the recipient can pledge them in the repo market, in return for cash. The recipient will then need to pay the repo rate on that cash borrowing. So the answer is that if bonds are posted as collateral, no particular PAI rate needs to be specified in the documentation.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.