Question

In a Treasury auction of $2 billion 182-day par value T-bills, there are $600 million noncompetitive bids as well as the following competitive bids: Bidder Bid Amount Price $800 million $0.9936 $700 million $0.9938 $300 million $0.9930 $900 million $0.9940 $0.9930 $0.9936 $0.9937 $0.9938 $0.9940

Answer 1

The question is a little unclear, but I assume we need to find the PRICE determined at the auction.

First lets arrange the given PRICES from Highest to Lowest

Bid Amount Price

$900 million $0.9940

$700 million $0.9938

$800 million $0.9936

$300 million $0.9930

The bids with the HIGHEST Price (Lowest Discount Rate) will be considered first.

Here, the Treasury is looking to raise $2 Billion which is equal to $2000 Million, therefore, the first $900 million will be considered as it has the highest bid price that is $0.9940. Then $700 million will also be considered as it has the second highest price that is $0.9938. Now we only need $400 Million more to raise the desired amount $2000 million, so only $400 million out of the $800 million dollars at the next highest price $0.9936 will be considered.

Since, the desired amount of $2 Billion is fulfilled at the price of $ 0.9936, that becomes are cutoff price. All bids above $0.9936 will be accepted and all bids below $0.9936 will be rejected.

Non-Competitive Bidders have to accept price determined at the auction. Therefore,the auction is cleared at $0.9936 and all successful competitive and non competitive bidders will have to pay the price $0.9936.

Hence, the answer is $0.9936