The Treasury plans to issue $200 million of 52-day Treasury Bills using a Dutch

Question

The Treasury plans to issue $200 million of 52-day Treasury Bills using a Dutch auction system. They received $75 million in non-competitive bids. They also received the following competitive bids: Broker-dealer A bids $40,000,000 at 6.1% Broker-dealer B bids $85,000,000 at 5.6% Broker-dealer D bids $45,000,000 at 4.9% Broker-dealer E bids $60,000,000 at 4.2% Broker-dealer F bids $75,000,000 at 3.9% Broker-dealer F bids $57,000,000 at 3.6% What rate will the U.S. Treasury pay for this issue of T-Bills? What amounts will each broker-dealer receive?

Explanation / Answer

In this question, the Treasury is planning to issue $200 million of T-bills using a Dutch auction system which is a method whereby the price of the offering is set after taking into consideration all the bids to determine the highest price at which the total offering can be sold.

Bids can be competitive and non-competitive as is the case with this question. The non-competitive bids as the name suggests is a bid which will be accepted by the Treasury and these bidders will surely get the securities. Normally non-competitive bids are made by small investors and individuals. The competitive bids are made by bigger investors like the institutional investors or large countries.

Total Offering = $200 million

Non-competitive bids = $75 million

Amount to be raised through the competitive bid = Total Offering - Non-competitive bids

= (200 - 75) = $125 million

Competitive bids arranged in order of lowest to highest yield since the issuer would prefer lower yields to its investors. The arrangement is as follows:

Now, the Treasury needs to raise $125 million so bids will be accepted in the same order as above until the required amount is raised. $57 million will be accepted in whole then only $68 million of the $75 million bid will be approved to get the required total amount of $125 million.

Since the last accepted bid is at a yield of 3.9% so all bids above it will be accepted and below it will be rejected. Also, all the accepted bids will get a yield of the highest accepted yield which is 3.9%.

The amount that will be received by each broker-dealer will be 3.9% yield over the amount they paid for the offer.

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