An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

Question

Quizplus · Accepted Answer

The repo rate is the interest rate at which the lender (in this case, the investor) will earn on the transaction.

Using the formula:

Repo rate = (interest earned / initial investment) x (360 / number of days)

We know the initial investment is $9,923,418 and the investor will earn $76,582 ($10,000,000 - $9,923,418) at the end of the 90-day period.

Plugging in the numbers:

Repo rate = ($76,582 / $9,923,418) x (360 / 90) = 0.031, or 3.1%

An Investor Initially Purchased Securities at a Price of $9,923,418