Declaration of auction results, Financial Management

Typically, there exist two types of bids in the treasury auction process. They are: Competitive bid and non-competitive bid.

A non-competitive bid is a bid an entity submits and which is willing to purchase the auctioned security at the pre-determined yield by the auction process. Normally, individual investors, who are mostly smaller institutional investors, submit a non-competitive bid for purchase of treasury securities. In such case, the bidder submits only the desired quantity but not the yield at which he is willing to purchase the auctioned security. This desired quantity should not exceed $1 million for treasury bills and $ 5 million for treasury coupon securities.

On the contrary, competitive bid is a bid submitted by the bidder in which he specifies the quantity desired and the yield at which he is willing to purchase the auctioned security. Normally, these are the bids the brokers/dealers, depository institutions, and some of the larger money management firms submit.

The auction results are declared after deducting the total non-competitive tenders and non-public purchases from the total securities auctioned. Non-public purchases mean the purchases made by the Federal Reserve itself. The remaining amount after such deduction is meant for distribution among the competitive bidders.

Subsequently, the bids are arranged from the lowest yield bid to the highest yield bid, i.e., the bids are arranged from the highest price to the lowest price. Until the amount to be distributed to the competitive bidders is completely allocated, all competitive bids (starting form the lowest yield bid) are accepted. Further, the highest yield the treasury accepts is referred to as stop yield and bidders at that yield are awarded a percentage from their total tender offer.

In US, all treasury auctions are single-price auctions. In it, all bidders are awarded securities at the stop yield i.e., the highest yield of accepted competitive tenders. This type of auction is termed as 'Dutch auction'. 

Posted Date: 9/8/2012 6:47:20 AM | Location : United States







Related Discussions:- Declaration of auction results, Assignment Help, Ask Question on Declaration of auction results, Get Answer, Expert's Help, Declaration of auction results Discussions

Write discussion on Declaration of auction results
Your posts are moderated
Related Questions
Explain the terminal value calculation at the end of the forecast period.  Why is it necessary? The firm whose business operation is being valued isn't expected to suddenly cea

Explain the pricing-to-market phenomenon. Answer: The pricing-to-market abbreviated as PTM refers to the phenomenon that similar securities are priced in a different way for diff

Treasury Bills, popularly known as T-bills, are issued in India by the RBI on behalf of the Government of India. T-bills are short-term securities with a maturity of 91

Accept-Reject Rule: The decision rule is to accept the project if the computed payback period is less than the standard.  If not, reject it.  While ranking the projects, projec

(a) Presume we have a portfolio of n names with some default correlation ρ . The risk of the complete portfolio moves according to the change in default correlation. Alternative

Define the P/E valuation method. Under what circumstances should a stock be valued using this method? The P/E ratio points out how much investor are willing to pay for each dol

Question: i) What are the rationales of interest swaps? ii) You are the corporate treasurer of LSE International Inc. Your firm, rated as AAA, is able to raise capital in

What are the risks associated with using a large amount of short-term financing for working capital? Using a large amount of short-term financing in general allows funds to be

The graphical representation of the relationship between yield and maturity is known as yield curve. Yield curve risk is the risk of experiencing an adverse

Yield to call is the yield that would be realized on a callable bond assuming the issuer of the bond redeems it before maturity. A bond's call provision is detail