Explanation:
To calculate the repurchase price in a repo agreement, we use the formula:
Repurchase Price = Original Price × (1 + (Repo Rate × Days/360))
Given:
Step 1: Calculate the number of days From June 1 to September 1 is exactly 3 months. Since June has 30 days, July has 31 days, and August has 31 days:
Step 2: Calculate the interest
Interest = Original Price × Repo Rate × (Days/360)
Interest = 180,000,000 × 0.009 × (92/360)
Interest = 180,000,000 × 0.009 × 0.255556
Interest = 180,000,000 × 0.0023
Interest = $414,000
Step 3: Calculate repurchase price
Repurchase Price = Original Price + Interest
Repurchase Price = 180,000,000 + 414,000 = $180,414,000
Therefore, the correct repurchase price is $180,414,000, which matches option C.
Ultimate access to all questions.
At initiation of a repurchase agreement (repo), counterparty A sells a security to counterparty B for settlement on June 1st, 2015 at an invoice price of USD 180 million. At the same time, counterparty A agrees to repurchase the security three months later, for settlement on September 1st, 2015, at a purchase price equal to the original invoice price plus interest at a repo rate of 0.90%. Using the actual/360 convention of most money market instruments, which is nearest to the repurchase price?
A
$414,000
B
$180,000,000
C
$180,414,000
D
$181,620,000
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