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 $31,950,000, with the promise to buy them back at a price of $32,000,000.

Calculate the yield on the repo if it has a 5-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Calculate the yield on the repo if it has a 15-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Calculate the yield on the repo if it has a 5-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

The yield on this repo to the bank is calculated as follows:

Part A: 5 - Day Maturity

Yield on the repo = ((32,000,000 - 31,950,000)/ 31,950,000) * 360/5

Yield on the repo = 0.00156495 * 72

Yield on the repo = 11.27%

Part B: 15 - Day Maturity

Yield on the repo = ((32,000,000 - 31,950,000)/ 31,950,000) * 360/15

Yield on the repo = 0.00156495 * 24

Yield on the repo = 3.76%

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