When securities repurchased under repos commonly have a principal amount that differs from principal amount of the security originally sold under the agreement, is known as:
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A. B. C. D.B
The correct answer is B. Breakage.
A repurchase agreement, commonly known as a repo, is a transaction where one party sells a security to another party and simultaneously agrees to buy the security back at a later date. The repurchase price is typically higher than the sale price, and the difference between the two prices represents the interest earned by the buyer of the security.
In some cases, the principal amount of the security that is repurchased under the repo may differ from the principal amount of the security that was originally sold under the agreement. This can happen when the value of the security changes between the sale and repurchase dates.
The difference in principal amount is known as breakage. It represents the amount by which the repurchase price must be adjusted to reflect the change in the value of the security. For example, if a security with a principal amount of $10,000 is sold under a repo agreement, but the repurchase price is based on a principal amount of $9,500 due to a decline in the value of the security, the breakage is $500.
Breakage can be positive or negative, depending on whether the value of the security has increased or decreased. It is important for both parties to the repo agreement to understand how breakage is calculated and how it can impact the transaction.
To summarize, when securities repurchased under repos commonly have a principal amount that differs from principal amount of the security originally sold under the agreement, it is known as breakage.