FIN301: Financial Instruments, Institutions and Markets

The US Government wanted to auction $600 million worth of 1-year Treasury Bills. Bids for $100 million worth of Treasury Bills were submitted on a non-competitive basis.

(a) Based on the competitive bids submitted, describe, using a table, how you determine the price:

(i) The stopped-out price

(ii) The allocations to banks 4, 5 and 6

(12 marks)

(b) You have $1,000 to invest for two years and have two choices:

Alternative 1: 2-year zero coupon bond selling at a price of 92.

Alternative 2: A bank deposit which pays according to the following rates:

1 year spot rate 3.0%

3 year spot rate 4.5%

1 year forward rate two years from now 4.0%

Analyse the alternatives to determine the amount received from each alternative at the end of two years. (Give answer to nearest dollar) (8 marks)

Institution Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Amount Bidded $100 m $50 m $150 m $50 m $100 m $100 m $175 m Price 98.0 97.5 97.0 96.5 96.0 95.5 95.0 Institution Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Amount Bidded $100 m $50 m $150 m $50 m $100 m $100 m $175 m Price 98.0 97.5 97.0 96.5 96.0 95.5 95.0