Question

Assume that the sale of $ 1 billion in govt bonds resulted in following top four competitive bids listed in order of yield bid Bond Yield Number % 4.701 4.704 4.707 4.708 Amount 600 200 200 300 4 There was also $ 70 million in non competitive bid. How would the bonds be allocated? bill Quotation: T-bills are quoted in the financial press according to two methods Bond Equivalent Yield used in Canada 1000-P/P * 365/N Banker Discount Yield used in US 1000-P/1000 360/N Q1 Estimate P and EAR on the 3rd T-bill Q2 The quoted T-bill bond Equivalent yield is 12.21% percent. what is the effective annual rate of return of this bill if it matures in 173 days? Q3 A bill has a bank discount yield of 6.81% based upon the asked price and 6.9% based upon the bid Price. The maturity of the bill (already accounting for skip day settlement) is 60 day:s Find the bid and ask Price of the bill Calculate the bond equivalent yield of the bill as well as its effective annual yield based upon the selected price. Confirm that these exceed the discount yield i)

Answer 1

Sale of $1 Billion of Govt Bonds

competitive bids are collated in ascending order of Yield

Number   Bond Yield % Amount in Millions Remark

1. 4.701 600 Accepted

2. 4.704 200 Accepted

3. 4.707 200 Accepted upto this $1 billion is absorbed

4. 4.708 300 Rejected

and $70 million received as non-competitive bid

So the $70 million will be allocated at weighted average cut-off yield