Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $ 24,950,000, 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.

For a. is 10.30% and for b. is 3.43%

Explanation:

To compute the Repo yield, the formula is used which is shown below:

= (Buy back Price - Purchase price) : Purchase Price * (360 : given time period)

a. The computation of yield on the repo if it has a 7 - day maturity is displayed below

= ($25,000,000 - $24,950,000) : $24,950,000 * (360:7)

= 10.30 %

b. The computation of yield on the repo if it has a 21 - day maturity is displayed below

= ($25,000,000 - $24,950,000) : $24,950,000 * (360:21)

= 3.43 %

Assume, 360 days in a year

Thus, for a. is 10.30% and for b. is 3.43%