In: Finance
Money Markets Problem
You decide to invest in $9,250,000.00 of Bankers Acceptance due
in 332 days and quoted at 3.500%. You finance the investment with a
repo at 2.500% over the same period.
Your initial investment in the Bankers Acceptance is?
$________
on which you earn interest of? $______
You pay interest of? $_______
thereby making a profit of? $_______
Was this a smart investment? (Yes/No)
Your initial investment in the Bankers Acceptance is? $8,960,766
on which you earn interest of? $2,89,234
You pay interest of? $2,03,208.63
thereby making a profit of? $86,025.37
Was this a smart investment? (Yes/No) Yes
Explanation :
A) | Bank acceptances are bought at discount and the face value is received by the investor after maturity | ||||||||||
Hence, the amount of investment can be computed as follows : | |||||||||||
Assume it as x | |||||||||||
[(9,250,000-x)/x] * 360/332 = 3.5% | |||||||||||
solving the equation, x = 8,960,766 | |||||||||||
Hence, the initial investment = $8,960,766 | |||||||||||
B) | Interest earned = $9,250,000 - $8,960,766 = $2,89,234 | ||||||||||
C) | Interest payment on the repo | ||||||||||
=8,960,766*2.5%*(332/366) | |||||||||||
203,208.63 | |||||||||||
D) | Profit = Interest earned - Interest paid | ||||||||||
=289,234-203,208.63 | |||||||||||
86,025.37 | |||||||||||
E) | Yes, this was a smart investment, since profit of over $86,000 is earned in the transaction |