Canadian Securities Course (CSC) Level 1 Practice Exam

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How does the competitive tender system work?

  1. Issuing bonds through a direct public offering

  2. Selling securities at a predetermined price

  3. Setting prices based on yield bids

  4. Issuing bonds through auction

The correct answer is: Issuing bonds through auction

The competitive tender system involves the issuance of bonds through auction, where various bidders offer their pricing and yield conditions for the bonds being sold. In this system, underwriters submit bids that specify the yield they are willing to accept, and based on these bids, the issuer accepts the most favorable yields to determine the actual price of the bonds. This process ensures that the bonds are sold at a price that reflects market demand and yields, offering a fair and competitive environment for both the issuers and investors. This method contrasts with other ways of issuing securities, such as direct public offerings or predetermined selling prices, where pricing does not fluctuate based on bidders' yields or competitive scenarios. The auction mechanism allows for a transparent way of determining bond prices and yields, thereby ensuring an efficient allocation of resources in the capital markets.

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