Buy/Sell Back
Any term repo trade done on a DVP basis can be expressed as a spot purchase and forward sale simply by converting the cash flow at maturity into the forward price. The economic impact of a buy/sell back will be identical to those of the repo. The investor's interest, however, would be represented by the difference between the bond purchase price and the re-sale or forward price (a repo does not have a forward price). The purchaser of the securities retains any accrued interest and coupon payments during the life of the transaction. However, the end leg of the buy sell back takes account of any coupons received by the purchaser and includes these in the maturing cash.
An example of a buy/sell back transaction can be found below. The calculation includes a coverage of forward pricing and this link shows an illustration of a Bloomberg buy/sell back pricing analysis as well as an alternative forward pricing analysis.
| Buy/Sell back transaction calculation | |||
|---|---|---|---|
| UBS buy/sells 25 million T 2.75 07/31/06 | |||
| Nominal | 25,000,000 | ||
| Trade date | 30 July | ||
| Value date | 2 August | ||
| End date | 2 September | ||
| Term | 31 days | ||
| Repo rate | 2% | ||
| Clean price | 100.14 | ||
| Accrued interest | = (2.75/100) x (2/365) = 0.000150684 |
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| Clean value | = nominal x clean price = 25,000,000 x 1.0014 = 25,035,000 |
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| Accrued interest at start | = nominal x coupon = 25,000,000 x 0.000150684 = 3,767.12 |
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| Repo price | = clean price + accrued interest = 1.0014 + 0.000150684 = 1.001550685 |
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| Start proceeds | = clean value + accrued interest = 25,000,000 + 3.767.12 = 25,038,736.12 |
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| Repo interest | = nominal x repo price x repo rate x term = 25,000,000 x 1. 001550685 x 2/100 x 31/360 = 43,122.32 |
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| End proceeds | = start proceeds + repo interest = 25,038,736.12 + 43,122.32 = 25,081,858.44 |
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| Accrued interest at end | = nominal x coupon = 25,000,000 x (2.75/100) x (33/365) = 61,650.56 |
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| Forward price (re-sale price) | = (end proceeds - accrued interest at end)/nominal x 100 = ((25,081.858.44 - 61650.56)/25,000,000) x 100 = 100,080831 |
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Note: the number of days of accrued interest at the start is 2 days worth for this treasury bill. Therefore at the end of repo accrued interest is 33 days worth.
