Question

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 30 days for $5,000,000. What is the yield?

Answer 1

The amount for which the securities shall be bought is $4,925,000

The amount for which they shall be sold is $5,000,000

Amount of return is $75,000 ($5,000,000 - $4,925,000) (Sale Value - Purchase Value)

Now, this return is earned in 30 days. Assuming that there are 360 days in a year. Yield can be calculated as follows:

ie. (Amount of return/ Purchase Value) * 100 *(360 / No. of days in which return is earned)

=( $75,000 / $4,925,000 ) * 100 * ( 360 / 30)

=(0.01522842639) *100 * (12)

= 18.27%

Thus, the yield is 18.27%