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Dear John,
Please can you adviseR enters a repo agreement as follows
– sell £4M (nominal) UK Treasury Bills for £3.94M
– but then back 45 days later for £3.96M
Determine the effective interest rate
Solution: ( 0.02/3.94 ) x 365 / 45 = 4.11%Please can you explain why we multiply by 365 and divide by 45 days and not the other way around as I thought.
Thank you very much.
Because the interest of 0.02/2.94 is the interest over the 45 days. Given that there are 365 days in a year, the effective yearly interest rate is got by multiplying by 365/45.
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