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.​

Calculate the yield on the repo if it has a 19-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

Repurchase agreements happens when one bank sells a security to an other with an agreement that the later will buy back those securitoes at a [redetermined price. Yield is calculated on the profit earned during that period by the bank who has sold the securities.

Given
Price to be paid at the end of 19 day P_t= $22000000
Price at which T-bills are borrowed P₀ = $21950000
TIme to maturity t = 19 days

Yield =[ (P_t-P₀)/P₀] * (360/)t
      = [(22000000-21950000)/ 21950000]*/(360/19)
   = 0.0022779*360/19
   = 0.043160293
   = 4.31603%

Therefore yield would be 4.31603%