Question

he Commonwealth Government has announced a $550 million Treasury bond issue by competitive tender. The 10-year bonds have a fixed coupon of 6.0% per annum. The Reserve Bank plans to take $100 million of the allocation and the remaining $450 million will be allocated according to bids received. The following bids are received: Bank A $150 million Yield 6.50% p.a. Bank B $125 million Yield 6.90% p.a. Bank C $150 million Yield 6.70% p.a. Bank D $250 million Yield 7.00% p.a. Bank E $100 million Yield 6.00% p.a. Determine the amount of allocation received by the bidding banks in the order of priority. Select one: a. Bank D ($250 million); Bank B ($125 million); Bank C ($75 million) b. Bank E ($100 million); Bank A ($150 million); Bank C ($150 million); Bank B ($50 million) c. Only Bank E will receive allocation d. All bidding bank will receive allocation equally e. Bank A ($150 million); Bank B ($125 million); Bank C ($75 million); Bank D ($150 million)

Answer 1

Answer:

The answer is option B

Explanation:

The yield from Bank E is the lowest among all banks (6.00 percent), and it will get a $100 million offer made by it first. Next, Bank A will obtain an allocation (out of $450 million) in the amount of $150 million bid made by Bank A as its yield is very higher than Bank E but lower than other banks (B , C and D).

Bank C will ultimately get a $150 million bid as its yield is higher than Bank E and Bank A but lower than Bank B and Bank D. Eventually, the remaining $50 million (450-100-150 million-150 million) bid goes to Bank B with higher yields than all banks (except Bank D).