Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from...
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.
Homework Answers
a. Yield on the repo = [($25,000,000 − $24,995,000) / $24,995,000] × (360 / 7) = 0.0103 or 1.03%
b. Yield on the repo = [($25,000,000 − $24,995,000) / $24,995,000] × (360 / 21) = 0.0034 or 0.34%
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