Question

Treasury wants to issue $30 billion of 180-day Treasury bills. There are $5 billion of noncompetitive bids and $64 billion of competitive bids. The competitive bids are as follows: $13 billion at 2.75%; $11 billion at 3.50%; $10 billion at 4.00%; $9 billion at 3.25%; $8 billion at 3.00%; $7 billion at 3.75%; and $6 billion at 2.50%. (a) What will be the highest return/rate accepted and paid to all successful bidders? (b) What would be the bond-equivalent yield (investment rates) paid to all successful bidders? (c) What would be the price for the newly issued 180-day Treasury bills and report your answer to six decimal places like the Treasury does? Report your answers in the table.

a. Highest return accepted:
b. Bond equivalent yield:
c. Price to six decimal places:

Answer 1

Treasury bills include a portion on non competitive bid where certain portion of bills are reserved for certain investors which are non competitive. It essentially reduces the portion available for competitive bidding. Hence in the given scenario out of 30 billion, 25 billion is available for competitive bids and 5 billion for non competitive.

Treasury will select the bids in the ascending order which are providing the money at the lowest rate such that the bucket of 25 billion is filled.

Following bids shall be accepted in the ascending order of cost of borrowing:

6 billion at 2.5%, 13 billion at 2.75%, 6 billion (Out of 8 billion) at 3%

a) Highest return accepted is 3%.

b) Bond Equivalent yield is the annual return on the investment in bonds

Treasury bills are issued using Dutch Auction, Hence the winning bid price shall be applicable to all bidders. Hence the highest price offered to fill up the bucket shall be applicable to all the bids which are accepted.

Hence the bond equivalent yield shall be equal to the highest return accepted of 3%.

c) Assuming per bond par value is 1000. Treasury bills are zero coupons which are issued at discount so that the redemption value fulfils the expected return with no intermediary coupons. It is a 180 days T Bills, we will find the present value of 1000 value bond to be received at 180th day discounted at effective 1.5% (3% * 180 / 360)

Price of bond = 1000 / 1.015 = 985.221675