3 ms·
Can you explain the steps that you're thinking and explain why they would matter at this scale?
by arthurcolle 4y ago
Can you explain the steps that you're thinking and explain why they would matter at this scale?
- fuoqi 4y agoA bank has 10 year bond which trades 90 cents on the dollar on the open market. It gives the bond to Fed as collateral and receives 1 dollar. It uses this dollar to buy bonds on open market with rate higher than cost of the loan, after 90 days it sells the bond, gives the Fed 1 dollar and interest, and pockets the rate spread on 10 cents.
- iforgetti 4y agoA bond bought by a bank in the past at a lower interest rate than those offered today is worth less than those offered today. If the fed values those bonds at face value (rather than what the market would pay today) and allows the bank to borrow money using those as collateral, then a bank could simply borrow from the fed using the older less valuable bonds as collateral and then buy new more valuable bonds. The bank could then default on the loan and forfeit the original less valuable bond. This would effectively be the fed giving free money to the bank.
- HDThoreaun 4y agoYou can't just "default on a loan." The Fed would reposes their other assets...