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Question 4 The US Government wanted to auction $500 million worth of 1-year Treasury Bills. Bids for $50 million worth of Treasury Bills were submitted on a non-competitive basis. Any bid greater or equal to 35% of the total amount offered for auction will be disqualified. Institution Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Amount Bidded $100 m $50 m $50 m $100 m $100 m $150 m $175 m Yield 3.00% 2.75% 2.5% 2.25% 2.00% 1.75% 1.5% (b) You want to invest a sum of money for two years and have two alternatives: Alternative 1: 3-year 5% coupon AAA bond selling at a par. Alternative 2: A AAA bank deposit which pays according to the following rates: 1 year spot rate 1 year forward rate one year from now 1 year forward rate two years from now 4.0% 4.5% 5% Analyse the alternatives to determine which one is the better deal. (8 marks) Question 4 The US Government wanted to auction $500 million worth of 1-year Treasury Bills. Bids for $50 million worth of Treasury Bills were submitted on a non-competitive basis. Any bid greater or equal to 35% of the total amount offered for auction will be disqualified. Institution Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Amount Bidded $100 m $50 m $50 m $100 m $100 m $150 m $175 m Yield 3.00% 2.75% 2.5% 2.25% 2.00% 1.75% 1.5% (b) You want to invest a sum of money for two years and have two alternatives: Alternative 1: 3-year 5% coupon AAA bond selling at a par. Alternative 2: A AAA bank deposit which pays according to the following rates: 1 year spot rate 1 year forward rate one year from now 1 year forward rate two years from now 4.0% 4.5% 5% Analyse the alternatives to determine which one is the better deal. (8 marks)

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