Question

The Australian government issues bonds through a discriminatory variable rate auction.

Which of the following statements is correct?

	A.	The only bidders who do not receive any bonds at all are those who bid above the cut-off yield.
	B.	The winners are the bidders with a yield above or equal to the cut-off yield.
	C.	The winners receive a yield equal to the cut-off yield.
	D.	The cut-off yield is a decision made by the AOFM.

Answer 1

C. The winners receive a yield equal to the cut-off yield.

Australian Government Securities (AGS) are issued by the Commonwealth of Australia through the AOFM.

For the sale of government securities, the sellers around the world mainly use two basic auction formats to determine the amount to allocate to each bidder and the price the bidder has to pay.

In a discriminatory price auction, multiple homogeneous items are sold at different prices. When bidders submit sealed bids to the auctioneer in order to participate in an auction, they have to indicate the amount that they want to buy as well as the price that they want to pay for it.

The demands of the bidders, starting with the highest price bidder down, are met until all the objects are allocated. All winning bidders pay the unit price they submitted.

In simple words, 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.