RSM430H1 Lecture Notes - Lecture 3: Real Interest Rate, Primary Dealer, Interest Rate Risk
Document Summary
Swap curve represents where highly rated institutions lend to each other. Used when there is not a well-established government yield curve. Liquidity depends on issue size and bid/ask spread. Government is only issuers that issues through auction. Receive quantity at average price, regardless of type of auction. Government posts lowest acceptable yield and keeps lowering price until primary dealers come in. Winning bidders all pay same price (stop out price) Winning bidders pay bid price for each bond until supply exhausted. Government goal at auction is to get best price for bonds. Research shows single price and multiple price are not better than other. Bid cover ratio: total quantity of bids to total quantity of bonds for auction. Involves interest rate risk if market changes before they can close position. Primary dealers limited to 10-25% of size of auction. Primary dealer: investment bank that government allows to participate in auctions. Must prove they have balance sheet to participate in auction.
