# Repo agreements, haircuts, and leverage visualized

Interactive repo agreement explainer for fixed income: haircuts, advance rates, asset-to-equity leverage, debt-to-equity leverage, equity losses, and margin calls.

Canonical URL: https://exclam.ai/visuals/repo-agreements/

Fixed income concept

A repo haircut is the slice of the position you fund yourself. If the haircut is 5%, a $100 bond can be financed with $95 of repo cash and $5 of equity, creating 20x asset-to-equity leverage.

Collateral

$100.00

Bond position

Haircut

5.0%

$5.00

Repo cash

$95.00

95.0% advance

Asset leverage

20.0x

assets / equity

Repo model inputs

Bond collateral value$100.00Haircut5.0%Asset price move-1.00%Repo rate4.50%Repo tenor1 days

## Funding stack

The haircut is the borrower-funded slice of the bond position. The repo lender finances the rest.

Advance rate

95.0%

Figure: Repo funding stack

### Your funding slice

The haircut requires $5.00 of your own capital to control $100.00 of collateral.

### Two leverage definitions

20.0x using assets / equity; 19.0x using debt / equity.

### Loss magnifier

-1.00% on the bond changes equity by -20.0% before repo interest.

## Haircut to max asset leverage

The shortcut is approximately asset leverage = 1 / haircut. Lower haircuts create a steep leverage curve.

Figure: Haircut to leverage curve

## Why 5% means 20x, not always 19x

In fixed income conversation, leverage often means asset exposure divided by equity. The same balance sheet can also be described as debt divided by equity. Both are correct if the definition is stated.

Asset / equity

$100.00 / $5.00

20.0x

Debt / equity

$95.00 / $5.00

19.0x

Shortcut

1 / 5.0%

20.0x

## The 1% move problem

Repo financing makes the debt side sticky. If the bond price falls, the repo cash owed does not fall with it. The loss comes out of equity first.

Equity before move

$100.00 - $95.00

$5.00

Equity after move

$99.00 - $95.00

$4.00

Equity P&L

$4.00 - $5.00

-$1.00

Equity return

-$1.00 / $5.00

-20.0%

## Equity return from asset moves

Before financing interest, equity return is approximately asset return divided by the haircut.

Figure: Equity sensitivity to bond price moves

Repo transaction map

## The repo flow

1

### 1. Start

Borrower owns $100.00 bond collateral.

2

### 2. Finance

Lender advances $95.00 cash against the bond.

3

### 3. Haircut

Borrower funds $5.00 equity, the haircut slice.

4

### 4. Close

Borrower repurchases for $95.0119 and receives collateral back.

Economically, the borrower keeps exposure to the bond while funding most of the purchase with collateralized debt.

Margin call pressure

## Haircuts are also maintenance discipline

If collateral falls, the lender may ask for more collateral or repayment so the loan is again covered by the required haircut. The exact legal mechanics depend on the repo agreement, but the balance sheet pressure is the same.

Current loan-to-value

96.0%

loan / moved collateral

Collateral shortfall

$1.00

to restore haircut

Debt repayment equivalent

$0.95

same pressure in cash

Equity wipeout move

-5.0%

before repo interest

## Haircut shortcut table

The quick approximation is asset leverage equals 1 divided by the haircut. Small haircuts create very large exposure relative to equity.

| Haircut | Approx asset leverage | Equity on $100 bond |
| --- | --- | --- |
| 1% | 100x | $1.00 |
| 2% | 50x | $2.00 |
| 5% | 20x | $5.00 |
| 10% | 10x | $10.00 |
| 20% | 5x | $20.00 |

## Repo interest is separate

The haircut is capital support. The repo rate is the financing cost. On this setup, the financing cost is small over a short tenor, but it still raises the break-even asset move.

Repo interest

$95.00 x 4.50% x 1/360

$0.0119

Repurchase price

$95.00 + $0.0119

$95.0119

Break-even asset move

$0.0119 / $100.00

0.012%

## Fixed income framing

### Collateralized borrowing

A repo is economically close to borrowing cash against securities collateral while agreeing to repurchase the securities later.

### Haircut as lender cushion

The haircut protects the lender against market value declines, liquidity frictions, and closeout delay.

### Leverage is definition-sensitive

Always check whether the context means asset / equity, debt / equity, or balance-sheet leverage under accounting rules.

## Repo haircut FAQ

Is a repo haircut a fee?

No. The haircut is the portion of the collateral value that the borrower must fund with their own equity or excess collateral. Repo interest is the financing cost.

Why does a 5% repo haircut imply 20x leverage?

Using asset exposure divided by equity, $100 of collateral supported by $5 of equity is 20x. Using debt divided by equity, the $95 loan over $5 equity is 19x.

What happens when the bond price falls?

The repo debt is still owed, so the first loss hits the borrower equity. A 1% fall on a 5% haircut reduces equity from $5 to $4 before repo interest, a 20% equity loss.

Why do lenders demand haircuts?

The haircut gives the lender a cushion against collateral price moves, liquidity costs, operational delays, and counterparty default during closeout.

## More visual finance concepts

Return to the concept hub as the library grows.

[Financials Visualized](https://exclam.ai/visuals/index.md)