What price mechanism is typically used during a treasury bill auction?

During a treasury bill auction, the mechanism that is typically used is competitive price setting. This process allows investors to submit bids specifying the quantity of bills they wish to purchase along with the price they are willing to pay. The auction concludes by accepting bids starting from the highest price (or lowest yield) down to the lowest price that can clear the total offering. This competitive method ensures that the treasury obtains the best possible financing terms based on current market conditions.

Bids can also be categorized as either competitive or non-competitive. Competitive bids are executed at the price determined by the auction results, while non-competitive bidders agree to accept whatever yield is determined through the auction. This system encourages investors to determine the price they are willing to pay, reflecting their personal assessment of the market, and ensures that the treasury can effectively manage its borrowing costs.

The other options do not accurately reflect the nature of treasury bill auctions: fixed price sales do not allow for adjusting prices based on competition; random price assignments do not align with the structured and transparent nature of auction pricing; and variable discount pricing is not a method used in the context of treasury bills, which are sold at a discount to face value based on competitive bidding.