What are the different types of auctions used for issue of securities?
Prior to introduction of auctions as the method of issuance, the interest rates were administratively fi xed by the Government. With the introduction of auctions, the rate of interest (coupon rate) gets fi xed through a market based price discovery process. 4.1 An auction may either be yield based or price based. i. Yield Based Auction: A yield based auction is generally conducted when a new Government security is issued. Investors bid in yield terms up to two decimal places (for example, 8.19 per cent, 8.20 per cent, etc.). Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notifi ed amount of the auction. The cut-off yield is taken as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected.
