105 Underwriting Bond Issues
Underwriting Bond Issues
In acting as an intermediary between a bond issuer and a bond buyer, the investment banker serves as an underwriter for the bonds. When investment bankers underwrite the bonds, they assume the risk of buying the newly issued bonds from the corporation or government unit; they then resell the bonds to the public or to dealers who sell them to the public. The investment bank can then earn a profit, based on the difference between its purchase price and the selling price; this difference is sometimes called the underwriting spread.
Things To Know
- When investment bankers underwrite bonds, they assume the risk of buying the newly issued bonds.
The banker writes the needed documents
When the investment banker works with a client corporation or government unit, it generally also prepares required documents for Securities and Exchange Commission (SEC) filing, helps set a price for the issue, and takes the lead in forming and managing an underwriting group—also known as a purchase group or syndicate. This syndicate spreads the risk of the new issue to a larger number of participating investment bankers and improves the likelihood of selling all of the newly issued bonds.
The best efforts agreement—an alternative
Sometimes the investment banker markets a new issue but does not underwrite it. The investment banker simply acts as a sales agent under a best efforts agreement, promising to do its utmost to market the bonds. The investment banker has the option to buy the bonds and usually purchases only enough bonds to meet buyer demand, receiving a commission on the bonds sold.
