Answer:
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 %
