PLEASE SOLVE AND SHOW ALL WORK 2. Treasury-Bill Auction In a Treasury auction of

Question

PLEASE SOLVE AND SHOW ALL WORK

2. Treasury-Bill Auction In a Treasury auction of S1.3 billion par value 91-day T-bills, the following bids were submitted Bidder Bid Amount Price S500 million $0.9938 S750 million $0.99 11 Sl 5 billion $0.9914 $0.9937 si billion S300 million $0.9939 a. If only these competitive bids are received, who will receive T-bills, in what quantity, and at what price? b. If the Treasury also received S500 million in non-competitive bids, who will receive T-bills, in what quantity, and at what price?

Explanation / Answer

a. In competitive bids, the bids with higher pricer are alotted first. In our case, bidder 5 has the highest bid, followed by bidder 1 followed by bidder 4.

Bidder 5 - $300m - $0.9939

Bidder 1 - $500m - $0.9938

Bidder 4 - $500m - $0.9937

Note that total available securities are only for $1.3billion. The first two bidders will be allocated their entire bid amount but for bidder 4, only $500m worth of securities are available.

b. In non-competitive bids, the price that the non-competitive bidder receives is the average bid price for all competitive bids.

So, in our case, after allocating securities to bidder 5 and 1, the remaining securities worth $500 million will be allocated to non-competitive bidder at an price of $0.99385 (average of 0.9939 and 0.9938).

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