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CFA Level 1 - Institutional Investors and Financing Purchases
Methods Used by Institutional Investors in Bond Markets to Finance Purchases
Institutional investors tend to finance their purchases in two ways instead of purchasing securities outright. They are: 
  • Buying on Margin - In this form of financing the buyer borrows funds from a broker/dealer who in turn gets the cash from a bank. The institution is charged an interest rate plus some additional charges for using this method. Regulations T and U, as well as the Securities Act of 1934, limit the degree to which the margin can be extended to the buyer.
     
  • Repurchase Agreements - These are collateralized loans in which the institution sells a security with the commitment to purchase the same security at a later date. The length of time could be as short as overnight or extend all the way to the maturity of the security. The price that is agreed upon is the repurchase price and the institution is charged a repo rate. The repo rate is an implied interest rate, which is the cost that the institution incurs for funding the position. Its benefit is that it is a very cheap way to finance a position because the repo rate tends to be set around the Federal Funds rate.

Next: CFA Level 1 - Interest Rate Risk

Table of Contents
1) CFA Level 1 - Chapter 14: Fixed Income
2) CFA Level 1 - Bond Features
3) CFA Level 1 - Basic Coupon Structures
4) CFA Level 1 - Early Retirement
5) CFA Level 1 - Provisions for Redeeming Bonds
6) CFA Level 1 - Refunding, Prepayments and Sinking Fund Provisions
7) CFA Level 1 - The Importance of Embedded Options
8) CFA Level 1 - Institutional Investors and Financing Purchases
9) CFA Level 1 - Interest Rate Risk
10) CFA Level 1 - Call and Prepayment Risk
11) CFA Level 1 - Reinvestment Risk
12) CFA Level 1 - Yield Curve Risk
13) CFA Level 1 - Credit Risk
14) CFA Level 1 - Liquidity Risk
15) CFA Level 1 - Exchange-Rate Risk
16) CFA Level 1 - Volatility Risk
17) CFA Level 1 - Inflation Risk
18) CFA Level 1 - Event Risk
19) CFA Level 1 - Pricing Bonds
20) CFA Level 1 - Duration
21) CFA Level 1 - International Bonds
22) CFA Level 1 - Government Bonds
23) CFA Level 1 - Mortgage-Backed Securities
24) CFA Level 1 - Federal Issues
25) CFA Level 1 - Bondholder's Rights
26) CFA Level 1 - Other Types of Bonds
27) CFA Level 1 - Asset-Backed Securities
28) CFA Level 1 - Yield Curves
29) CFA Level 1 - The Term Structure of Interest Rates
30) CFA Level 1 - Types of Yield Measures
31) CFA Level 1 - Intermarket vs. Intramarket Sector Spreads
32) CFA Level 1 - Options and their Benefits
33) CFA Level 1 - After Tax Yield of a Taxable Security
34) CFA Level 1 - LIBOR
35) CFA Level 1 - Bond Valuation Basics
36) CFA Level 1 - Cash Flow
37) CFA Level 1 - Bond Value and Price
38) CFA Level 1 - Arbitrage-free Valuation Approach
39) CFA Level 1 - Typical Yield Measures
40) CFA Level 1 - Assumptions Underlying Traditional Yield Curve Measures
41) CFA Level 1 - Importance of Reinvestment Income and Reinvestment Risk
42) CFA Level 1 - Spot Rates and Bond Valuation
43) CFA Level 1 - Differentiating Between Spreads
44) CFA Level 1 - What are Forward Rates?
45) CFA Level 1 - Forward Rates vs Spot Rates
46) CFA Level 1 - Measuring Interest Rate Risk
47) CFA Level 1 - Price Volatility
48) CFA Level 1 - Modified, Macaulay and Effective Duration
49) CFA Level 1 - Convexity
50) CFA Level 1 - Price Value of a Basis Point (PVBP)
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