Four Methods of Distributing Government Securities
The central governments use one of the following four methods to distribute a new issue of securities:
Regular calendar auction / Dutch style auction
In this type of auction, there is a regular auction cycle. The winning bidders are allocated securities at yield (price) they bid. This is also called multiple-price method.
Regular calendar auction / Minimum-price offering system
This is also a regular auction but all the winning bidders are awarded securities at highest yield accepted by government (stop-out yield). This is also called single price method. For example, if the highest yield is 6.55%, and you had bid 6.52% you will be awarded securities at 6.55%. In the dutch style auction, you would have been awarded the securities at 6.52% (your bid). US government bonds are issued using this method.
Ad hoc auction
Ad hoc auctions are announced by the government when the market conditions are favourable. Typically, the amount and maturity of issue are announced only at the time of the auction. Ad hoc auctions provide increased flexibility to raise funds, and also lessens the volatility which is high in regular auctions.
Tap system is where the additional bonds of previously outstanding issues are auctioned. The government will periodically announce about these bonds.
- Types of Markets in Economics
- Demand Function and Demand Curve
- Supply Function and Supply Curve
- Shifts in Demand and Supply Curves
- Aggregating Demand and Supply Curves and Concept of Equilibrium
- Excess Demand and Excess Supply
- Stable and Unstable Equilibrium
- Types of Auctions
- Four Methods of Distributing Government Securities
- Consumer and Producer Surplus
- Effects of Government Regulation on Demand and Supply
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Price Elasticity of Demand