U.S. Treasury notes are sold at a discount. A buyer, for example, might offer $950 for a
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U.S. Treasury notes are sold at a discount. A buyer, for example, might offer $950 for a $1,000 note that will become due in two years because money received in the future is not as valuable as money received now. In September 1992, the U.S. Treasury began selling two-year and five-year Treasury notes using a uniform-price auction, in which all winning bidders pay the same price. Before September 1992, the Treasury used a discriminatory-price auction to sell securities. The following simple example illustrates the difference between the two types of auctions. Bidders A and B each submit a sealed bid for two-year Treasury notes of $1,000. Bidder A bids $950; Bidder B bids $925. Suppose the Treasury accepts both bids. In a uniform-price auction A and B both pay $925; in a discriminatory-price auction A would pay $950 and B would pay $925. Suppose you are willing to pay up to $950 for two-year Treasury bills. a. Show that a uniform-price auction is similar to a second price sealed bid auction. b. Should you bid $950 if the Treasury is using a discriminatory-price auction? c. Should you bid $950 if the Treasury is using a uniform-price auction?
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a In a second price sealed bid auction your bid determines whether or not you will win but does not ...View the full answer
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