When governments want to raise money, they do so by issuing bills (typically short-term) and bonds (longer term maturities can reach 30 years or more). The method is usually an auction. Remember that the issuer wants to raise capital as cheaply as possible and that means at the lowest possible yield (the yield is the annual return divided by price as a percentage. So the more a bidder bids, the lower the yield will be).
A competitive auction is where institutional and individual investors fight to get the bonds. It should ensure the issuing government raises the money it needs at the lowest cost.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Alternatively, you may bid non-competitively and take bonds at the yield determined by the competitive bid process.
See Tim Bennett's video tutorial: Bond basics.
-
Inflation holds steady at 3.8% ahead of BoE meetingThe rate of inflation did not rise in August, but the Bank of England is still expected to keep interest rates on hold tomorrow
-
Thousands of savers with £250k pensions take cash over tax-free money and IHT fearsWith a record £70 billion withdrawn from pensions in the year to March, experts are concerned savers are making knee-jerk decisions without advice that could affect their long term wealth
