27 Suppose a bank enters a repurchase agreement in which it

2-7 Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $32,950,000, with the promise to sell them back to the correspondent bank at a price of $33,000,000. a. Calculate the yield on the repo if it has a 4-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 12-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 %

Solution

a. Yield on the repo = [repurchase price - selling price]/ selling price * 360 days / maturity days

= [$33,000,000 - $32,950,000] /  $32,950,000 * 360 / 4

= 50000 /  $32,950,000 * [360 / 4]

= 13.66%

b. Yield on the repo = [repurchase price - selling price]/ selling price * 360 days / maturity days

= [$33,000,000 - $32,950,000] /  $32,950,000 * 360 / 12

= 50000 /  $32,950,000 * [360 / 12]

= 4.55%