Question

The 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 :- Option b). Bank E ($100 million); Bank A ($150 million); Bank C ($150 million); Bank B ($50 million).

Explanation :- The Yield of Bank E is lowest (6.00 %) among all the banks, thus, it will firstly receive bid of $ 100 Million made by it. Next, allocation (out of $ 450 million) will be made to Bank A amounting to $ 150 Million bid made by it as it's yield is quite higher than Bank E but lesser than other banks (B, C and D).

Later, Bank C will get bid of $ 150 Million as its yield is higher than Bank E and Bank A but lesser than Bank B and Bank D. Finally, remaining $ 50 Million (450 Million - 100 Million - 150 Million - 150 Million) bid goes to Bank B having its yield higher than all the banks (except bank D).

(In simple word, Allocation of 450 Million dollars made between banks on the basis of low to high yield offered by banks.)