Government securities can be auctioned either through yield based auction or price based auction.
What is Government Security (G-Sec)?
Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments.
G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
What are the types of auctions for issue of G-Sec?
Following are the types of auctions for issue of G-Sec –
- Yield Based Auction
- Price Based Auction
Yield Based Auction | Price Based Auction |
A yield-based auction is generally conducted when a new G-Sec is issued. | A price based auction is conducted when Government of India re-issues securities which have already been issued earlier. |
Investors bid in yield terms up to 2 decimal places (e.g., 8.19%, 8.20%, etc.). | Bidders quote in terms of price per ₹100 of face value of the security (e.g., ₹102.00, ₹99.00, etc., per ₹100/-). |
Bids are arranged in ascending order of yield quoted and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. | Bids are arranged in descending order of price offered and the cut-off price is arrived at the price corresponding to the notified amount of the auction. |
Successful bidders are those who have bid at or below the cut-off yield. | Successful bidders are those who have bid at or above the cut-off price. |
Bids which are above the cut-off yield are rejected. | Bids which are below the cut-off price are rejected. |
The cut-off yield is fixed as the coupon rate for the security. | Depending upon the method of allocation to successful bidders, auction may be conducted on Uniform Price basis or Multiple Price basis.
|
References
Reserve Bank of India. (2020, April 01). 'Government Securities Market in India – A Primer'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79
Comments
Post a Comment