The Treasury Department conducts an auction of a new series of 5-year T-note. Their objective is...

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The Treasury Department conducts an auction of a new series of 5-year T-note. Their objective is to borrow $100 million. (a) You are a fixed income dealer and the lowest acceptable yield on the 5-year T-note is 4.5% for you. If you were to send in a bid for the above T-note, what would be the optimal bid yield to send in? Briefly explain why it is optimal. (b) After the auction concludes, the Treasury Department receives the follow- ing bids from 4 dealers: Dealer Bid yield Amount willing to lend $20 million $60 million $50 million $20 million #2 #3 #4 3.00% 4.00% 5.00% 6.00% What is the winning bid of the auction? What will be the coupon rate of the newly issued 5-year T-note? The Treasury Department conducts an auction of a new series of 5-year T-note. Their objective is to borrow $100 million. (a) You are a fixed income dealer and the lowest acceptable yield on the 5-year T-note is 4.5% for you. If you were to send in a bid for the above T-note, what would be the optimal bid yield to send in? Briefly explain why it is optimal. (b) After the auction concludes, the Treasury Department receives the follow- ing bids from 4 dealers: Dealer Bid yield Amount willing to lend $20 million $60 million $50 million $20 million #2 #3 #4 3.00% 4.00% 5.00% 6.00% What is the winning bid of the auction? What will be the coupon rate of the newly issued 5-year T-note?

Answer rating: 100% (QA)

a To determine the optimal bid yield to send in we need to strike a balance between getting the allo... View the full answer