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I understand that, if cash is put as collateral, the party holding the collateral needs to pay the counter party the funding cost of the cash collateral (PAI). How about if bonds are put as collateral? what is PAI in this case and what is the reason?

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If bonds are given as collateral, the recipient can pledge them in the repo market, in return for cash. The recipient will then need to pay the repo rate on that cash borrowing. So the answer is that if bonds are posted as collateral, no particular PAI rate needs to be specified in the documentation.

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  • $\begingroup$ Does this mean that if you post cash as collateral, counter party would effectively fund the cash for you; but if you post securities as collateral, you would still be the one funding it, rather than the counter party? Did I get somewhere wrong ? $\endgroup$
    – Peaceful
    Commented Nov 15, 2021 at 20:49

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