Determine the annualized implied repo rate on a Treasury bond spread in which the March is bought at 98.7 and the June is sold at 99.5.The March CF is 1.225 and the June CF is 1.24.The accrued interest as of March 1 is 0.75 and the accrued interest as of June 1 is 1.22.
A)5.21 percent
B)10.03 percent
C)1.28 percent
D)2.42 percent
E)0.81 percent

Question

Quizplus · Accepted Answer

First, we need to calculate the net cost of carrying the position from March to June:

Net Cost = [(CF of June x June price) - (CF of March x March price)] - (Accrued Interest of June - Accrued Interest of March)
Net Cost = [(1.24 x 99.5) - (1.225 x 98.7)] - (1.22 - 0.75)
Net Cost = 1.24

Next, we need to calculate the implied repo rate using the following formula:

Implied Repo Rate = ((Net Cost / Purchase Price) x (360 / Days to Maturity))

Days to maturity can be calculated as 92 days (June - March)

Implied Repo Rate = ((1.24 / 98.7) x (360 / 92))
Implied Repo Rate = 0.121
Implied Repo Rate = 12.1%

However, this is the semi-annual implied repo rate. To annualize it, we need to multiply by 2:

Annualized Implied Repo Rate = 12.1% x 2
Annualized Implied Repo Rate = 24.2%

Therefore, the answer is B) 10.03 percent.

Determine the Annualized Implied Repo Rate on a Treasury Bond