In the modified dutch auction (also called single price auction), non competitive bids are reduced and then single price is arrived at.
Consider 35 billion dollars T-bills are to be auctioned off. Non-competitive bids are submitted for 5. Following is the table for competitive bids:-
Disc% Face value Cumulative FV
.1081 3 3
.1090 12 15
.1098 8 23
.1104 5 28
.1117 8 36
.1124 7 43
Now, if we reduce 5 from 35, we get 30. Till 28, the rate is .1104. So, all bidders should have got a discount of .1104. However, as 2 billion dollars are still left, we consider the higher discount of .1117.
Hence, is the single rate of .1117 the final discount for all bids - competitive and non-competitive. What is the significance of non-competitive bids? Is it that we reduce 5 and then consider the rates. This should mean that had the bids been like this, things would have been different?
Disc% Face value Cumulative FV
.1081 3 3
.1090 12 15
.1098 8 23
.1104 8 31
.1117 8 39
.1124 7 46
So, .1104 would have been the single price?