A dealer in government securities is considering buying $875,000,000 in 10-year
ID: 2662882 • Letter: A
Question
A dealer in government securities is considering buying $875,000,000 in 10-year U.S. Treasury notes and $1,425,000,000 in one-year U.S. Treasury bills. Current yields on the T-notes average 7.15 percent, while one-year T-bills yield average 3.28 percent. The dealer can currently borrow $2,300,000,000 through one-year repurchase agreements at an interest rate of 3.20 percent. Compute the dealer’s expected carry income for one year in each of the following two scenarios.A. The dealer purchases the T-notes and T-bills and finances them with the RP under the terms listed above.
B. Same as part A. above except that interest rates change to 7.30% on the T-notes, 5.40% on the T-bills and 5.55% on the RP, and the dealer must refinance the T-notes and T-bills purchase at the new RP rate.
Explanation / Answer
Not a real tough problem here, unless I'm missing something. Just figure out the income by multiplying the notes and bills by their respective interest rates and add the two together. Then figure out the cost by multiplying the total financed by the repurchase rate. Subtract the cost from the income and you will have the profit. On the first it is 62,562.50 +46,740-73,600= 35,702.50 On the second it is 63,875 +76,950- 127,650= 13,175