Types of government stocks, Financial Management

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Types of Government Stocks

Issue of Stock through AuctionThe RBI, on behalf of the government, issues notification to auction government securities, stating the amount and time. An applicant may submit more than one bid at different yields through separate applications for each bid. The aggregate amount of bids submitted by a person should not exceed the aggregate amount of Government Stock offered for sale. (The format of application form is given in the Appendix.) On the basis of the bids received, the Reserve Bank of India will determine the cut-off rate of yield at which offers to purchase the Government Stock will be accepted at the auction depending upon the notified amount. The coupon of the stock is decided in an auction. The successful bids offered at the cut-off rate of yield as determined by the RBI will be accepted at par. Other bids tendered at rates lower than the cut-off rate of yield determined by the RBI will be accepted at cut-off rates as quoted in the bid. The bidders will be issued these securities at a premium which will be determined in such a way that yield-to-maturity to the bidder will be equal to the rates at which they have put in their funds in the Government Securities. Bids quoted at rates higher than the cut-off rate of yield determined by the RBI will be rejected. The stock carries the same coupon till maturity.

Issue of Stock with Pre-announced Coupon Rates. 

The RBI also announces the coupon on stock before the date of floatation and the stock is issued at par. The interested bidders need to submit the application form to RBI (format of application is given in Appendix II). If the total subscription exceeds the aggregate amount offered for sale in respect of a fixed coupon stock, the RBI will make a partial allotment to all the applicants.

Stock with Variable Coupon Rates, viz., Floating Rate Bonds, etc.

In case of floating rate bonds, the stock will carry a coupon rate which will vary according to the change in the Base Rate to which it is related. The description of the Base Rate and the manner in which the coupon rate is linked to the Base Rate, floor and cap to the rate, if any, will be announced by RBI at the time of issue. The procedure for issuance is similar to that of pre-announced coupon rates.

 


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