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30 January, 10:31

Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $24,995,000, with the promise to buy them back at a price of $25,000,000. a. Calculate the yield on the repo if it has a 7-day maturity. b. Calculate the yield on the repo if it has a 21-day maturity.

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  1. 30 January, 13:31
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    a. The yield on the repo if it has a 7-day maturity is 1.03%

    b. The yield on the repo if it has a 21-day maturity is 0.34%

    Explanation:

    a. As per the information given in the question we have

    Purchase price of treasury securities = $ 24,995,000

    Repurchase price or Buy back price of treasury securities = $ 25,000,000

    Maturity Period = 7 days

    Applying the above values in the formula we have:

    The formula for calculating the yield on repo is

    = [ (Repurchase price - Purchase price) / Purchase price ] * (360 / Maturity Period)

    = [ ($ 25,000,000 - $ 24,995,000) / $ 24,995,000 ] * (360 / 7)

    = [ ($ 5,000) / $ 24,995,000 ] * (360 / 7)

    = 0.0002 * 51.428571

    = 0.010288

    = 0.0103 (when rounded off to four decimal places)

    = 1.03 %

    b. As per the information given in the question we have

    Purchase price of treasury securities = $ 24,995,000

    Repurchase price or Buy back price of treasury securities = $ 25,000,000

    Maturity Period = 21 days

    Applying the above values in the formula we have

    = [ ($ 25,000,000 - $ 24,995,000) / $ 24,995,000 ] * (360 / 21)

    = [ ($ 5,000) / $ 24,995,000 ] * (360 / 21)

    = 0.0002 * 17.142857

    = 0.003429

    = 0.0034 (when rounded off to four decimal places)

    = 0.34 %
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