Question: A treasurer in Europe would like to borrow USD for 3 months. But instead of an outright loan, the treasurer decides to use the repo market. The company has holdings of EUR40 million bonds. The treasurer uses a cross-currency repo. The details of the transaction are as follows:
• Clean price of the bonds: 97.00
• Term: September 1 to December 1
• Last coupon date on the bond: August 12
• Bond coupon 4% item EUR/USD exchange rate: 1.1150
• 3-month USD repo rate: 3%
• Haircut: 3%
a. What is the invoice price (dirty price) of the bond in question?
b. Should the repo be done on the dirty price or the clean price?
c. How much in dollars is received on September 1?
d. How much repo interest is paid on December 1?