Question

Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $19,950,000, with the promise to buy them back at a price of $20,000,000.

a. Calculate the yield on the repo if it has a 8-day maturity.
b. Calculate the yield on the repo if it has a 20-day maturity.

(For all requirements, use 360 days in a year. Do not round intermediate calculations. Round your answers to 5 decimal places. (e.g., 32.16161))
  

Answer 1

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Answer:

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

   = ($20000000 / $19950000 - 1 ) (360 / 8)

   = 11.27820%

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

   = ($20000000 / $19950000 - 1 ) (360 / 20)

= 4.51128%