The Federal Reserve is offering Treasury bills with a par value of $8 billion for sale. They have received $2 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: How much money will the Federal Reserve raise from this offering?

Question

The Federal Reserve is offering Treasury bills with a par value of $8 billion for sale. They have received $2 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are:  How much money will the Federal Reserve raise from this offering?

Quizplus · Accepted Answer

The total amount of bids received is $2 billion + ($10,000 x 800,000) = $10.002 billion.

Since the Fed is only offering $8 billion in Treasury bills for sale, they will only sell $8 billion worth of Treasury bills to the highest bidders (both competitive and noncompetitive).

The highest competitive bid is 100.0104, which means the bidder is willing to pay $10,001.04 for each $10,000 par value bond.

To determine how much money the Fed will raise, we need to calculate the total value of the highest competitive bids:

$10,001.04 x 800,000 = $8,001,032,000

Adding the noncompetitive bids of $2 billion, the total amount the Fed will receive from this offering is:

$8,001,032,000 + $2,000,000,000 = $10,001,032,000

However, since they are only offering $8 billion in Treasury bills for sale, the amount they will actually raise is:

$8,000,000,000 (par value of Treasury bills offered) + $1,001,032,000 (value of highest competitive bids) = $9,001,032,000

Therefore, the correct answer is (B) $7.88 billion.

The Federal Reserve Is Offering Treasury Bills with a Par