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Glossary

Auction


Auction - type of bond issue. There are several types of bond placement. In world practice, the following basic methods of placing bonds are used: the method of placing by auctions and the method of forming the order book.

The method of placing bonds by auctions follows the rules of the Dutch auction. According to this method the investors who offered the best conditions are considered the winners of the auction.

Placement of bonds by the auction method can be of two types: price auction and coupon rate auction.

Price auction. The issuer informs prospective investors in advance about the parameters of the issued bonds, publishing them in the prospectus: issue volume, bond maturity, coupon rate, bond par value and other parameters, but without indicating the offering price. Knowing the parameters of a bond, investors submit bids indicating the quantity and price at which they are ready to purchase these bonds. Usually, the submission of applications is done electronically, investors do not see the bids of their competitors. Then a consolidated register of applications is formed and transferred to the issuer. The register is built from the maximum price to the minimum. Analyzing the submitted bids, the issuer determines the cut-off price. Only bids with a price higher than or equal to the cut-off price are accepted.

If the issuer was unable to sell all the bonds at the first auction, then they have the opportunity to conduct additional auctions to place the remaining bonds. This is how subsequent auctions are called Non-competititve or Fix Price auction - this is an offer made by a small investor to buy a debt issue, the price of which is based on the average Competitive or Multi-price auction price. The non-competitive auction is meant for small investors and the competitive is oriented on large institutional investors.

Сoupon rate auction is conducted in a similar manner with the price auction. The difference lies in the fact that the issuer does not indicate the coupon rate in the parameters of the issue but indicates the placement price of the bonds, which, as a rule, is equal to the par value of the bonds. Investors submit bids indicating the number of bonds and the desired coupon rate. After completing the entry of applications, a register is formed. The bids on the register are ordered according to the increasing of the coupon rate. The issuer sets the coupon rate for the bond based on the analysis of bids. Only those bids are accepted where the coupon rate was stated below or equal to the rate set by the issuer. If it was not possible to sell all the bonds at the first auction, the issuer can hold additional auctions. However, the additional auctions will be held as a price auction as the coupon rate has already been determined in the first auction.
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