2-7 Suppose a bank enters a repurchase agreement in which it agrees to buy Treas
ID: 2826679 • Letter: 2
Question
2-7 Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $32,950,000, with the promise to sell them back to the correspondent bank at a price of $33,000,000. a. Calculate the yield on the repo if it has a 4-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Yield on the repo % b. Calculate the yield on the repo if it has a 12-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Yield on the repo %
Explanation / Answer
a. Yield on the repo = [repurchase price - selling price]/ selling price * 360 days / maturity days
= [$33,000,000 - $32,950,000] / $32,950,000 * 360 / 4
= 50000 / $32,950,000 * [360 / 4]
= 13.66%
b. Yield on the repo = [repurchase price - selling price]/ selling price * 360 days / maturity days
= [$33,000,000 - $32,950,000] / $32,950,000 * 360 / 12
= 50000 / $32,950,000 * [360 / 12]
= 4.55%
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