Final answer:
The yield of a 7-day repurchase agreement where treasury securities are bought for $24,995,000 and repurchased for $25,000,000 is approximately 0.1042%, with the closest answer choice being A) 0.20%. This yield reflects interest payments and potential capital gains and is influenced by prevailing market interest rates that affect bond prices.
Step-by-step explanation:
The student asked how to calculate the yield of a 7-day maturity repurchase agreement where a bank buys treasury securities at $24,995,000 and agrees to repurchase them at $25,000,000. To find the yield, we need to calculate the interest earned and then annualize it since the repurchase agreement is only for a week. The interest income is $25,000,000 - $24,995,000, which equals $5,000. To annualize this for a year, considering there are approximately 52 weeks in a year, the yield would be ($5,000 / $24,995,000) * 52. Calculating this, the yield is approximately 0.1042%, making the closest answer choice A) 0.20%.
The yield, or total return on investment, is composed of both interest payments and any capital gains. It is noteworthy to remember that the interest or coupon rate remains the same regardless of market changes. However, prevailing market interest rates can influence the price of bonds; when interest rates rise, existing bonds with lower coupon rates sell for less than their face value to remain competitive, while if interest rates fall, those with higher interest rates can sell for more than face value. Therefore, understanding these market dynamics is crucial for investors considering bonds as part of their portfolio.