Repurchase Agreement Yield Calculation

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    Repurchase agreement, commonly known as repo, is a transaction in which a security is sold with an agreement to buy it back at a later date. The yield on a repurchase agreement is a critical metric for investors to determine the profitability of the investment. In this article, we will discuss the calculation of repurchase agreement yield and its significance in the investment world.

    What is the Repurchase Agreement Yield?

    The repurchase agreement yield is the rate of return on a repo transaction. The yield is calculated by dividing the difference between the amount paid for the asset and the amount received at the end of the transaction by the amount paid for the asset. The yield is expressed as an annual percentage rate (APR).

    Formula for Repurchase Agreement Yield Calculation

    The formula for calculating the repurchase agreement yield is as follows:

    Repo Yield = (Buyback Price – Purchase Price) / Purchase Price x (360 / Days of Repo)

    Where:

    Buyback Price = Price at which the seller agrees to buy the security back

    Purchase Price = Price at which the security was purchased

    Days of Repo = Number of days for which the repo transaction is agreed upon

    For example, if an investor buys a security for $100,000 and agrees to sell it back for $101,000 after 10 days, the calculation of the yield would be as follows:

    Repo Yield = ($101,000 – $100,000) / $100,000 x (360 / 10)

    = 3.6%

    Significance of Repurchase Agreement Yield

    Repurchase agreement yields are significant in the investment world as they help investors to evaluate the profitability of their investments. Higher yields indicate higher profits, while lower yields indicate lower profits. Thus, investors use this metric to decide whether to invest in a particular security or not.

    Moreover, the repurchase agreement yield is also used to compare different repo transactions. Investors can use the yield to compare the same security on different dates or to compare different securities.

    Conclusion

    Repurchase agreement yield calculation is an essential metric for investors to determine the profitability of their investments. The calculation is simple and straightforward, and investors can use it to evaluate different repo transactions. Higher yields indicate higher profits, while lower yields indicate lower profits. Thus, investors should keep an eye on the yield to make informed investment decisions.