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20 July, 14:55

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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  1. 20 July, 15:38
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    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.
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