What Is A Haircut?

A haircut is a term referring to price spreads and the market value of assets. Almost all assets have a spread between the buy and sell price and this is one of the meanings of haircut.

The other meaning of the term haircut is how much an asset is reduced in value for calculating collateral levels. This is used as a buffer because there is a risk that the collateral behind an asset will devalue in the market, and the haircut is meant to take this into account.

For example, if a bond is issued at par (100) and then at maturity investors only receive 90 back, they will have taken a haircut of 10.

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