Question 1
Multiple ChoiceA fund enters into a repurchase agreement (repo) where it delivers USD20,000,000 in U.S. Treasury securities today and agrees to repurchase them in 60 days. The repo rate is 0.45%, and the year is assumed to have 360 days.
What is the repurchase price the fund must pay to reclaim the securities at the end of the repo term?
Explanation
The repurchase price is calculated using the formula:
Repurchase Price = Initial Amount × [1 + (Repo Rate × Days / 360)]
Initial Amount = USD20,000,000
Repo Rate = 0.45% = 0.0045
Days = 60
Repurchase Price = 20,000,000 × [1 + (0.0045 × 60 / 360)]
= 20,000,000 × [1 + 0.00075] = 20,000,000 × 1.00075 = USD20,045,000
This is the amount the original seller (borrower) must repay at maturity, which includes the interest earned by the lender during the term of the repo.