Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.

Question

Quizplus · Accepted Answer

The formula for calculating repo rate is:

Repo Rate = (Interest Paid / Principal) x (360 / Days)

Here, the principal is the amount paid for the securities, which is $4,921,349.
At the end of the 30-day period, Buser Corp. will receive $4,950,000, which means the interest paid is $28,651 ($4,950,000 - $4,921,349).
Using the formula, we get:

Repo Rate = ($28,651 / $4,921,349) x (360 / 30)
Repo Rate = 0.00584 x 12
Repo Rate = 0.07008
Repo Rate = 7.008%

Rounding this off to two decimal places, we get the answer as 6.99%, which is option C), the correct answer.