Final answer:
The AOFM serves bidders with the lowest price and accepts the highest bids in a competitive bidding process, aimed at minimizing the government's cost of borrowing for securities until the quantity on issue is exhausted.
Step-by-step explanation:
The Australian Office of Financial Management (AOFM) serves the bidders with the lowest price, and then accepts highest bids up to the exhaustion of the quantity on issue. This process is part of a competitive bidding system commonly used in government securities auctions, where the goal is to fill the total quantity at the lowest possible cost. Bidders specify the amount and the price they are willing to pay for the securities. The AOFM will then start accepting bids, starting from the highest price (lowest yield) and move to the lower-priced (higher yield) bids until the entire amount of the issue has been allocated.
This methodology ensures that the government's cost of borrowing is minimized while allowing market forces to determine the final interest rates on its debt securities. It is also known as the 'Dutch auction' method where the price paid by all successful bidders will be the same as the lowest price accepted.