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.

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 %