Consider the following statements about issuance of G-securities:
1. A price based auction is generally conducted when a new G-Sec is issued.
2. A yield-based auction is conducted when the Government re-issues securities.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Explanation Statement 1 is not correct: New Government Securities (G-Secs) are generally issued through a Yield-Based Auction, not a price-based one. In a yield-based auction, bidders quote the desired yield (%) they expect from the bond.The bids are arranged in ascending order of yield, and the cut-off yield becomes the coupon rate for that G-Sec.This method is ideal for new securities where no coupon rate is predetermined.
Statement 2 is not correct: For re-issuing an existing G-Sec, the Government uses a Price-Based Auction.In this method, the coupon rate is already fixed (from the original issue), so investors bid in terms of the price per ₹100 of face value. Bids are arranged in descending order of price, and the lowest accepted price becomes the cut-off.
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