Question

A bank enters into a repurchase agreement in which it agrees to sell Treasury securities to another bank at a price of $24,973,557, with a promise to buy them back at a price of $25,000,000 in 8 days. Repo yields are expressed as “single payment yields.” What is the single payment yield on this repo? Answer in percent to three decimal places. Omit the percent sign.

Answer 1

Solution:

The formula for calculating the single payment yield on repo is

= [ ( Repurchase price - Sale price ) / Sale price ] * ( 360 / Maturity Period )

Calculation of single payment yield on repo if it has a 8 – day maturity :

As per the information given in the question we have

Sale price of treasury securities = $ 24,973,557

Repurchase price or Buy back price of treasury securities = $ 25,000,000

Maturity Period = 8 days

Applying the above values in the formula we have

= [ ( $ 25,000,000 - $ 24,973,557 ) / $ 24,973,557 ] * ( 360 / 8 )

= [ ( $ 26,443 ) / $ 24,993,557 ] * ( 360 / 8 )

= 0.001059 * 45

= 0.047648

= 4.7648 %

= 4.765 % (when rounded off to three decimal places )

Thus the single payment yield on the repo if it has a 8– day maturity = 4.765