Question

Question 3 XYZ Corporation arranged a repurchase agreement in which it purchased securities for $10.9 million and will sell the securities back for $11.5 million in 65 days. What is the yield (or repo rate) to XYZ Corporation? What is the discount yield (or quoted yield)? What is the effective annual return?

Answer 1

the yield (or repo rate) to XYZ Corporation = [(selling price - purchase price)/purchase price]*360/no. of days

360 is the no. of days in a year.

the yield (or repo rate) to XYZ Corporation = [($11.5 - $10.9)/$10.9]*360/65 = ($0.6/$10.9)*360/65 = 0.055045871559633*360/65 = 19.81651376146789/65 = 0.3049 or 30.49%

discount yield (or quoted yield) = [(selling price - purchase price)/selling price]*365/no. of days

discount yield (or quoted yield) = [($11.5 - $10.9)/$11.5]*365/65 = ($0.6/$11.5)*365/65 = 0.0521739130434783*360/65 = 19.04347826086957/65 = 0.2930 or 29.30%

effective annual return = (1+ yield/(365/no. of days))^{365/no. of days} - 1

effective annual return = (1 + 0.3049/(365/65))^365/65 - 1 = (1 + (0.3049/5.615384615384615))^{5.615384615384615} - 1 = (1 + 0.0542972602739726)^{5.615384615384615} - 1 = 1.0542972602739726^{5.615384615384615} - 1 = 1.3457 - 1 = 0.3457 or 34.57%