Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury

Question

Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $21,950,000, with the promise to buy them back at a price of $22,000,000.

a. Calculate the yield on the repo if it has a 7-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 19-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 repo = {(buy back price / purchase price of bond) - 1 } (days base / days to maturity )

   = ($22000000 / $21950000 - 1 ) (360 / 7)

   = ( 1.0023 - 1) (360 /7)

   = 11.71%

b. yield on repo = {(buy back price / purchase price of bond) - 1 } (days base / days to maturity )

= ($22000000 / $21950000 - 1) ( 360 / 19)

   = (1.0023 - 1) (360 / 19)

   =4.32%

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