babygirl1501
New member
- Joined
- Jul 1, 2010
- Messages
- 13
A dealer is government securities is considering buying 875 million in 10 year Treasury notes and 1,425 million dollars in 6 month Treasury bills. Current yields on the T-notes average 7.15 percent, while 6 month T-bill yields average of 3.28 percent. The dealer can currently borrow 2,300 million through one-week repurchase agreements at an interest rate of 3.20 percent. Compute the dealers expected carry income in each of the following scenarios.
A) The dealer purchases the T-notes and T-bills and finances them with the RP under the terms above
B) Same as part (A) above except that interest rates change to 7.30 percent on the T-notes and 5.40 percent on the T-bills, and 5.55 percent on the RP, and the dealer must refinance the T-note and T- bill purchases at the new RP rate.
C) Same as part (B) above except the dealer had not purchased the T-notes adn T-bills until after interest rates change.
D) Repeat part (B) in the case where rates changed to 7 percent on the T-notes, 5.10 percent on T-bills, and 4.5 percent on RP
E) Repeat part (B) except the dealer had not purchased the T-notes and T-bills until after the interest rates changed.
F) Based on teh above results, is it always good for the dealer when interest rates rise? How about when they fall? Please Explain?
G) Could teh dealer have benefited by a short position case (B) or (D) above? Please Explain.
My work:
875,000,000 * .o715 * 1/360= 173,784.72
1,425,000 * .0328 * 1/360 = 124. 83
2,300,000 * .0320 * 1/360 = 204.44
Now do I just subtract the 204.44 from the 124.83 to obtain its carry income? Am I even doing this right? I am confused about what I am doing.. Can some please guide me in the right direction?
A) The dealer purchases the T-notes and T-bills and finances them with the RP under the terms above
B) Same as part (A) above except that interest rates change to 7.30 percent on the T-notes and 5.40 percent on the T-bills, and 5.55 percent on the RP, and the dealer must refinance the T-note and T- bill purchases at the new RP rate.
C) Same as part (B) above except the dealer had not purchased the T-notes adn T-bills until after interest rates change.
D) Repeat part (B) in the case where rates changed to 7 percent on the T-notes, 5.10 percent on T-bills, and 4.5 percent on RP
E) Repeat part (B) except the dealer had not purchased the T-notes and T-bills until after the interest rates changed.
F) Based on teh above results, is it always good for the dealer when interest rates rise? How about when they fall? Please Explain?
G) Could teh dealer have benefited by a short position case (B) or (D) above? Please Explain.
My work:
875,000,000 * .o715 * 1/360= 173,784.72
1,425,000 * .0328 * 1/360 = 124. 83
2,300,000 * .0320 * 1/360 = 204.44
Now do I just subtract the 204.44 from the 124.83 to obtain its carry income? Am I even doing this right? I am confused about what I am doing.. Can some please guide me in the right direction?