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]
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, and, in aggregate, they have received seven bids from lenders as follows:
Bid 1 for $1.00 billion at 5.115%
Bid 2 for $2.50 billion at 5.120%
Bid 3 for $3.50 billion at 5.125%
Bid 4 for $4.50 billion at 5.130%
Bid 5 for $3.75 billion at 5.135%
Bid 6 for $2.75 billion at 5.140%
Bid 7 for $1.50 billion at 5.145%
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.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
