Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $38,950,000, with the promise to buy them back at a price of $39,000,000. a. Calculate the yield on the repo if it has a 6-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e. g., 32.16)) Yield on the repo %b. Calculate the yield on the repo if it has a 18-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e. g., 32.16))

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Efrain

Business

19 September, 04:17

Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $38,950,000, with the promise to buy them back at a price of $39,000,000. a. Calculate the yield on the repo if it has a 6-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e. g., 32.16)) Yield on the repo %b. Calculate the yield on the repo if it has a 18-day maturity. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. (e. g., 32.16))

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Clinton Bender · Answer 1

Yield with 6-day maturity is 7.70%

Yield with 18-day maturity is 2.57%

Explanation:

The formula for yield on repurchase is given as:

y = (PAR - P) / P x (360 / t)

P=Purchase price

PAR=Repurchase price

t = number of days of the transaction

In first scenario, PAR is $39 million, P is $38.95 million and t=6

y = ($39000000-38950000) / 38950000 * (360/6)

y=7.70%

In the second scenario, details remained the same except for t that is 18

y = ($39000000-38950000) / 38950000 * (360/18)

y=2.57%

This implies the longer the maturity the lesser the yield since yield is computed on daily basis.