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]

The higher the ratio, the higher the demand. A ratio above 2.0 indicates a successful auction with aggressive bids.[2] A lower reading indicates weak demand and is said to have a long tail (a wide spread between the average and the high yield).

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:

  • 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.

See also

References

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