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Invesmtnemtns
Young Ho Eom

Exercise (US Treasury and Repo Markets)

1. What are the on-the-run, o¤-the-run, and o¤-o¤-the-run issues in the Treasury
market? (Sundaresan)

2. Brie‡y describe the roles played by the Federal Reserve in the Treasury mar-
ket. What methods are used by the Fed to implement its monetary policies?
(Sundaresan)

3. Describe the role of primary dealers in Treasury market. What are the risks
faced by the dealers in the Treasury market? What are the expected rewards?
(Sundaresan)

4. Describe clearly the salient features of the discriminatory auction mechanism

and uniform-price auction mechanism. Which mechanism is expected to have
a greater degree of winner’s curse? Why? (Sundaresan)

5. Suppose the Federal Reserve auctions $100 million (worth of maturity value) of
10-year notes. The competitive bids are:
A $40 million 4.6%
B $20 million 4.7%
C $30 million 4.8%
where the yields above are quoted on a bond equivalent yield. Noncompetitive
o¤ers total $20 million.

(a) Calculate the average yield on the accepted bids. Round the average yield
to the lower 8th of a percentage point: this is the coupon rate on the issue,
if the auction were conducted using the American auction system..
(b) Based on the coupon rate, calculate the price that competitive and non-
competitive bidders pay for $100,000 of maturity value. Calculate the total
revenue for the Treasury.
(c) Calculate coupon rate, sale price (for $100,000 of maturity value), and total
revenue for the Treasury, if the auction were conducted using the Dutch
system. (This time the coupon rate is set by approximating the stop yield
to the lower 8th of a percentage point.)
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6. (Sundaresan)

(a) Explain the role of the when-issued market in the context of Treasury auc-
tions. What are the advantages and disadvantages of when-issued trading?
(Sundaresan)
(b) Who are likely to be the buyers in the WI market and who are likely to be
the sellers? What consequences does the WI market have for the auction
prices and the secondary-market prices?
(c) Discuss the advantages and disadvantages of WI trading for (i) the ultimate
investor, (ii) primary dealers, (iii) the U.S. Treasury, and (iv) the price
discovery process.

7. Describe repo markets. What is the relationship between repo rates and Fed
fund rates? Under what circumstances can the repo rate be higher than the
Fed fund rates? (Sundaresan)

8. (Fabozzi )

(a) How can a repurchase agreement be used by a dealer …rm to …nance a long
position in Treasury security?
(b) One party in a repo transaction is said to “buy collateral,”the other party
to “sell collateral.”Why?
(c) When there is a shortage of a speci…c for a repo transaction, will the repo
rate increase or decrease?

9. Are government sponsored enterprise securities backed by the full faith and
credit of the U.S. government? What is the di¤erence between a government
sponsored enterprise and a federally related institution? (Fabozzi)

10. The following is from the March 1991 monthly report published by Blackstone
Financial Management: “The 3-year was issued at a 6.98% average yield, the
10-year at a 7.85% average yield, and the 30-year at a 7.98% average yield. All
bids were accepted at the average yield or better (i.e., with no tail), indicating
ample demand for securities.” What is the average yield and tail? Why does
the absence of a tail indicate ample demand for the Treasury auctioned?
Fabozzi, Bond Markets, Analysis and Strategies, Prentice Hall, 3rd eds.
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11. Suppose that the price of a Treasury bill with 90 days to maturity and a $1 mil-
lion face value is 980,000. What is the yield on a bank discount basis? (Fabozzi)

12. Calculate the dollar price for the following Treasury coupon securities: (Fabozzi)
Bond Price Quoted Par
(1) 95-4 $100,000
(2) 87-16 $1,000,000
(3) 102-10 $10,000,000
(4) 116-30 $10,000
(5) 102-4+ $100,000

13. An investor buys a face amount of $1 million of a six-month (182 days) Treasury
bill at a discount yield of 9.25%. What is the cost of purchasing these bills?
Calculate the bond equivalent yield. Indicate clearly the formula you used, and
show all the steps in your calculations. Recalculate the bond equivalent yield if
the T-bill has a maturity of 275 days? (Sundaresan)

14. On November 18, 1987, a 7 87 % T-bond maturing on May 15, 1990, was quoted
at 99 29
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for settlement on November 20, 1987. The last coupon was paid on
November 15, 1987. (Sundaresan)

(a) What is the invoice price of the T-bond?

(b) What is the yield on the T-bond?