A bank plans on borrowing $225 million for 10 days through an RP transaction collateralized by T-Bills.The current RP rate is 4.5 percent.What is the bank's total interest cost in dollars?

Question

Quizplus · Accepted Answer

The interest cost is calculated using the formula: Interest = Principal x Rate x Time. Here, Principal = $225 million, Rate = 4.5% per annum (or 0.045), and Time = 10/360 (since RP transactions typically use a 360-day year). Thus, Interest = $225,000,000 x 0.045 x (10/360) = $281,250.

A Bank Plans on Borrowing $225 Million for 10 Days