Haircut

When financial institutions like banks borrow money, creditors often ask for collateral to protect themselves against default (just as homeowners use their houses as security for a mortgage). Often this collateral will be in the form of financial securities, such as bonds. The creditors face the risk that the collateral might fall in value at the very time the borrower defaults. So they will not accept the collateral at its value, but will apply a discount, or haircut (for example, securities with a market value of $100m might only count as collateral of $90m). The more risky the securities, the greater the haircut.