Final answer:
Repo margin is influenced by the perceived riskiness of a loan and the comparison of interest rates between the original loan and the current market rates. High risk decreases value, while high-interest rates increase it, especially in the secondary loan market.
Step-by-step explanation:
Factors that affect the repo margin include the perceived riskiness of the loan and the comparison of interest rates. Financial institutions assess the borrower's ability to repay the loan based on characteristics such as income level and the strength of the local economy. A high level of risk will decrease the amount a financial institution is willing to pay for the loan in the secondary market. Conversely, a loan with a higher interest rate than the current market average will be more valuable. Additionally, during periods of economic downturn, such as a recession, the incidence of loan defaults can rise unexpectedly, impacting the value of the bank's assets and potentially leading to a negative net worth situation.