In 2008 a major bank in the US borrowed 10 million dollars for the US government at an annual rate of 0.50% compounded annually. They then used that money to purchase US government 30 year bonds (investment) that yields 4.65% compounded annually? How much did this cost the US taxpayers in the first year? [It will be the profit the bank makes] (use your financial application and fill in the appropriate inputs)
Interest paid by Bank
Interest earned by Bank.
$10,000,000 x 0.5/100 =$50,000 Interest paid by the Bank to US government.
$10,000,000 x 4.65/100 =$465,000 Interest earned by the Bank.
Note: From this, you might think that the cost to US government would the difference between the above two amounts. But, in fact, that is not so !!. Why? Because the bond may not have been purchased from the US government but from the secondary market trading in US securities. The true cost to the US government would the interest rate or the coupon rate at which the original bond was issued. It may be above 4.65% or significantly below it.