There are two ways to purchase T-Bills. The first is to enter a competitive bid at the
Question:
There are two ways to purchase T-Bills. The first is to enter a competitive bid at the auction where the bidding institution competes for a given dollar amount of the new issue based on how much it is willing to pay. Only the approximately 2000 securities brokers and dealers that are registered to operate in the government securities market are permitted to participate directly in the competitive bidding process. However, these registered firms may participate on behalf of their clients. Second, noncompetitive bids can be tendered by anyone where the prospective purchaser states how many bills he would like to purchase at the average price of accepted competitive bids. Competitive bidders for T-Bills generally enter their bids just before the deadline (1:00 PM Eastern Time) to participate in the auction. Noncompetitive bids are limited to $5 million and are normally due before 12:00 noon (Eastern Time) on the day of an auction.
Noncompetitive bids are satisfied at the average price of successful competitive bids.
The Treasury determines the dollar amount of competitive bids that it wishes to satisfy by subtracting the face values of the noncompetitive bids from the level of bills that the Treasury wishes to sell. Successful competitive bids are selected by ranking them, starting with the highest bid. Successful bidders obtain their bills at the prices that they bid; the lowest bid is referred to as the stop-out price. Consider the following example involving a Dutch auction of $20 billion in 91-day T-Bills, where the bids (based on yields to maturity) by financial institution are given as follows:
Further suppose that individual investors have placed noncompetitive bids totaling $2.5 billion. What is the bid-to-cover ratio in this auction? What is the stop-out price? Which bids will be satisfied?
Step by Step Answer:
Obviously the Treasury wants to sell as many bills as possible at ...View the full answer
