Bid-to-cover ratio

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Bid-To-Cover Ratio is a ratio used to measure the demand for a particular security during offerings and auctions. In general, it is used for shares, bonds, and other securities. It may be computed in two ways: either the number of bids received divided by the number of bids accepted, or the value of bids received divided by the value of bids accepted. [1] [2]

Contents

The higher the ratio, the higher the demand. A ratio above 2.0 indicates a successful auction with aggressive bids. [3] A lower reading indicates weak demand and is said to have a long tail (a wide spread between the average and the high yield). [4]

Example

For example, suppose debt managers are seeking to raise $10 billion in ten-year notes with a 5.130% coupon, and, in aggregate, they have received seven bids from lenders as follows:

The total of all bids received is $19.5 billion, and the number of bids accepted would be $10 billion, therefore leading to a bid-to-cover ratio of 1.95 (calculated by the value method). Since the managers are interested in raising the cheapest debt possible, bids 1, 2, 3 will be covered in full ($7 billion). Bid 4 will be partially covered ($3 billion out of $4.5 billion). Bids 5, 6, 7 will be rejected. The final coupon will be fixed at 5.130% (the rate of the last bid accepted) for all the bids covered.

See also

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References

  1. bid-to-cover ratio
  2. "Bid-to-cover ratio". nasdaq.com. Retrieved 10 September 2024.
  3. Bid-to-Cover Ratio
  4. "Bid-to-cover ratio definition". capital.com. capital.com. Retrieved 10 September 2024.