PRMIA Exam 8006 Topic 3 Question 22 Discussion

In a Dutch auction, the buyers put in their bids and the price at which the entire auction clears is the price at which each bidder receives the security. For example, if Bank A bids 5.5% for a bond, Bank B bids 5.6% and Bank C bids 5.7% and the total amounts bid by these three banks are enough to clear the auction, each of the banks will receive the bond at the price paid by the lowest successful bidder, ie Bank C. This is even though Banks A and B had bid higher (remember that bidding a higher yield means offering a lower price).

In a standard auction, every bidder pays the price they bid.

In a Dutch auction, there is an incentive to bid aggressively if a participant believes the final winning bid will be lower.