Non-Competitive Tender

Definition

Non-Competitive Tender refers to a method of purchasing government securities at an auction where the buyer agrees to accept whatever yield determination results from the auction process. This is typically done by individual investors rather than large institutional investors. It allows investors to submit a tender for a purchase without specifying a yield.

Phonetic

The phonetic pronunciation of “Non-Competitive Tender” would be: “Nahn-Kuhm-Peh-Tih-Tiv Ten-Der”

Key Takeaways

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1. Specific Targeted Group: Non-Competitive Tender often targets small investors, individual investors, or certain investor groups who aren’t typically able to participate in larger public offerings.
2. No Price Competition: In a Non-Competitive Tender, investors agree to accept whatever yield is determined at auction. This means they have zero control over the price and it eliminates the prospect of price competition.
3. Guaranteed Allocation: One of the main benefits of Non-Competitive Tender is the guarantee of receiving the security that was bid for, as long as the investor is willing to accept the yield determined at auction.

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Importance

Non-Competitive Tender is a significant term in business/finance as it relates to the process of buying or selling government securities, specifically treasury bills, without competing for the best price. Generally used by smaller investors, this method allows them to submit a tender to purchase a given quantity of the new issue at the average price of all competitive bids accepted. The importance lies in its ability to provide equal opportunity to both small and large investors to participate in the auction. It ensures that small investors are not edged out by large institutional investors, thereby promoting wider participation and maintaining stability in the market.

Explanation

Non-Competitive Tender involves a process where a potential investor is willing to purchase a security such as a treasury bond for a specified amount and is acceptable to receive whatever yield the auction determines. It is used more on the lines of a long-term gain rather than instantaneous profits. The purpose of this approach is to ensure the buyer’s full participation in the market without any influence from the bidding process or the final auction results. It assists in preventing allocations based on price, and the investor is guaranteed a specified quantity of the security.This mode of purchase is typically used by small investors who are not necessarily interested in disrupting the median price of the bidding process. The non-competitive tender allows them to submit a bid to purchase at the average price of all competitive bid prices received during the auction. This ensures that they receive a fixed rate of return, protecting them from price volatility. This process provides small investors with an equal opportunity to participate in auctions alongside large financial institutions and avoid potentially high risk and uncertainty.

Examples

1. Government Bonds: Governments usually raise money for their various projects via bond issues. When these bonds are to be issued, they are done through both competitive and non-competitive tenders. On one hand, competitive bidders specify the price they want to pay or the yield they want to receive. While on the other hand, non-competitive tender investors agree to accept the Treasury’s average price determined by competitive tender bids. This method provides a risk-free way for amateur investors to invest in government securities.2. Spectrum Auctions: In the telecommunications industry, companies frequently bid on the rights to utilize various parts of the electromagnetic spectrum. Some companies can be allowed to make a non-competitive tender, accepting the price that is set by competitive bidding. This is commonly observed in the case of smaller companies that lack the financial power to compete with the industry’s behemoths.3. Public construction projects: In public sector construction projects, governments may sometimes allow some lesser-known, smaller sector contractors to bid non-competitively. This is practiced to promote small businesses by providing them with opportunities to participate in larger-scale projects, accepting the standard pricing determined by the competitive tenders. Such a practice can be beneficial for local contractors who would otherwise not get an opportunity to work on such large-scale projects due to financial constraints.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Bid Security
• Procurement
• Public Tender
• Auction Theory
• Treasury Bills

Sources for More Information

• Investopedia
• Corporate Finance Institute
• Wall Street Mojo
• The Free Dictionary – Financial Dictionary