A broker-dealer enters into a 7-day repurchase agreement, selling $5 million in Treasury bonds at 99.5% and agreeing to repurchase at 100%. What is the dealer's approximate annualized financing cost?

Why D — 26.14%

The dealer sells at 99.5% ($4,975,000) and repurchases at 100% ($5,000,000), paying $25,000 in interest over 7 days. Annualized: ($25,000 / $4,975,000) x (360 / 7) = 0.5025% x 51.43 = approximately 25.85-26.14%. The high annualized rate reflects the very short duration of the agreement. Repos are typically quoted on an annualized basis using a 360-day money market convention, so even small absolute costs produce high annualized rates over very short periods.