Question

In: Finance

Money Markets Problem You decide to invest in $9,250,000.00 of Bankers Acceptance due in 332 days...

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)

Solutions

Expert Solution

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

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