1. Scott Nicol Andrew Burg

2.  Financing Government Debt  Foreign Government Borrowing  Tax Payer Receipts  Issuance of Government Debt

3.  Foreign Government Borrowing  Traditional Means of Financing  World War I  Major Lending Countries at War  United States Forced to Fund the War through Increased Taxes and Debt

4.  Tax Payer Receipts  War Revenue Act of 1917  Increased Income Tax Rate  Decreased Minimum Tax Rate Income Level

5. Revenue Act of 1917 War Income Tax on Individuals Tax Rates from 1916 ActTax Rates from 1917 Act Net Income (dollars) Normal Rate (percent) Additional Rate (percent) Like Normal Rate (percent) Like Additional Rate (percent) Combined Rate (percent) 020204 5,00020215 7,50020226 10,00020237 12,50020248 15,00020259 20,000212710 40,0002221016 60,0002321421 80,0002421826 100,0002522231 150,0002622535 200,0002723041 250,0002823446 300,0002923750 500,00021024054 750,00021024559 1,000,00021125065 1,500,00021225066 2,000,00021325067

6. □ Issuance of Government Debt  Fixed Price Securities Determined by Government  1914 Peace Time Debt totaled $968 Million  1919 Interest Bearing Debt Magnified to $25.2 Billion

7.  1920’s - Government Noticed Fixed Price Debt was consistently over-subscribed  Indicated Under-pricing of Issued Debt  1929 - Explored the British Treasury Bill Market  Important Amendments to Debt Offering System  Securities offered when needed  Auctioned to competitive bidders  First Auction was held for $100 Million in 90 day Bills on December 10 th, 1929

8.  Changes Since 1929  Treasury Notes and Bonds Still Offered at Fixed Prices until 1970  By 1983 Auctions were changed to reflect the yield instead of the discounted price  Most significant change came in 1992 with the introduction of the single-price format

9.  Finance United States Debt  Current Debt: $10,717,998,123,287.70 (2/5/09)  Goal: Finance government borrowing at the least cost  Issue securities at regular and predictable schedule  Easier for investors to predict future offerings  Factors  Deficit?, economic outlook, maturing issues  Input from primary dealers, general public

10.  Multiple per week  2 Types of Bids:  Non-Competitive  Smaller Firms, Individual Investors  Specify amount only  Competitive  Primary Dealers, Institutional Investors  Specify amount wanted and yield  Single Price Auction – All winning bidders get same yield  Let’s try it.

11.  Scenario: Treasury Auction for $30B in 5-yr notes  Bids: Non-Competitive: 1) $1.0B Competitive: 2) $4.5B1.69% 3) $7.3B1.70% 4) $6.5B1.72% 5) $8.7B1.74% 6) $3.8B1.75% $2.0B1.75% 7) $5.2B1.76% - Total so far: $28B $2.0B remaining to auction - Pro rata share = $2.0B/$3.8B = 52.6% Stop Yield Total: $30B ………… Price too low—Receive zero

12.  How can they make sense? (Remember primary goal)  Fundamentally Different than regular auction  Many items, many bidders, many winners  Multiple Price (Traditional) Auctions  Winner’s Curse – causes bidders to bid lower amounts (more cautious)  Single Price Auctions  Fear of winner’s curse eliminated  Bidders bid full reservation price  Less complex = more participation = Demand Higher Price

13.  History of Debt Financing and the Beginning of Auctions  Goal of US Treasury: Finance public debt at least possible cost  Done by auctioning government securities in single price auctions  Single price auctions get Treasury best price for securities