new issues

Question 1

What two parties sign the underwriting agreement?

Answer 1

the issuer and the managing underwriter.
>underwriting manager represents all underwriters
>signs underwriting agreement on behalf of the underwriting group

Question 2

T/F: The underwriting agreement is signed by the issuer and the managing underwriter.

Answer 2

True
>issuer signs
>managing underwriter signs on b

Question 3

T/F: The Municipal Securities Rulemaking Board (MSRB) does not require issuers of new municipal securities to prepare a final official statement.

Answer 3

True
>MSRB doesn’t regulate issuers
>requirement is for member firms to prepare an official statement

Question 4

Are muni bond issuers required to prepare an official statement?

Answer 4

No
>this is a requirement of the member firms
>not the issuer

Question 5

A final official statement must be delivered to retail buyers of a new issue on or before the _____date.

Answer 5

Settlement date

>deliver on or before settlement date

Question 6

Under Regulation D, a private placement transaction exemption applies if the offering is limited to a maximum of ___ nonaccredited investors.

Answer 6

35

>Reg D, max of 35 nonaccredited investors

Question 7

T/F: The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public.

Answer 7

True

>SEC doesn’t approve/guarantee

Question 8

T/F: regarding new issues, the “spread” is the sum of the manager’s fee, the underwriting fee, and the selling concession.

Answer 8

True
>manager’s fee
>underwriting fee
>selling concession

Question 9

Regarding new issues, the “spread” is the sum of the managers fee, underwriting fee, and the _____ concession

Answer 9

selling concession

The spread is the sum of the manager’s fee, the underwriting fee, and the selling concession.

Question 10

What is “lettered” stock

Answer 10

Stock obtained in a private placement

>can’t be sold unless meeting requirements of Regulation D or Rule 144

Question 11

T/F: “Lettered” stock is stock acquired in a private placement that can’t be sold unless meeting the requirements of Regulation D or Rule 144

Answer 11

True
>lettered stock obtained in private placement
>have to meet Reg D or rule 144 requirements
>”lettered” because there’s a legend on the stock certificate that says shares are restricted

Question 12

T/F: Unlike registered corporate issues, investors may place orders for a new municipal bond issue before the issue has even been awarded to the syndicate.

Answer 12

True
>for muni new issues, can enter presale orders
>presale orders have the highest priority in terms of allocation

Question 13

T/F: regarding new muni issues, presale orders have the highest priority in terms of allocation

Answer 13

True
>presale orders highest allocation priority

(no presale orders for corporate issues, just munis)

Question 14

T/F: For “presale orders” in a new muni offering, all syndicate members share proportionately in the takedown (their underwriting compensation).

Answer 14

True
>all syndicate members share proportionally in the compensation (takedown) from presale orders

(presale orders highest allocation priority)

Question 15

In order for a corporation to meet the definition of “accredited investor” it must have a net worth of at least $___

Answer 15

$5 mil

>for accredited investor, corporation net worth $5 million

Question 16

Can an underwriting syndicate may have more than one underwriting manager?

Answer 16

Yes

> An underwriting syndicate may have more than one manager.
This is typically the case on very large issues.

(Regardless of the number, all participants in the underwriting must be FINRA members)

Question 17

T/F: Persons characterized as restricted persons are prohibited from purchasing shares of new issues.

Answer 17

True

Restricted person can’t buy new issue

Question 18

Are national and state bank securities exempt from resigration provisions of the Securities Act of 1933?

Answer 18

Yes, exempt from registration

“National and state banks are regulated by various state and federal agencies.”

Question 19

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days?

A)
1%
B)
.1%
C)
.01%
D)
10%

Answer 19

A) 1%

Explanation
Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the past four weeks' trading volume (whichever is greater) every 90 days.

Question 20

T/F: if a reg D offfering is advertised, all purchasers must be accredited

Answer 20

True

>if advertise Reg D, investors must be accredited

Question 21

Is an interstate offering (Rule 147 exemption, limited to companies that do business in one state and limit stock or bond sales to that state’s resident) exempt from state registration?

Answer 21

No,

Intrastate offering expemt from federal, not state registration

Question 22

When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period?

A)
Three months
 B)
None
 C)
Six months
 D)
One year

Answer 22

B) none

Question 23

Does an official notice of sale contain the bonds rating?

Answer 23

No

“The notice of sale is the advertisement placed by a municipality soliciting bids from underwriters for an issue it wishes to sell. It does not include the bond’s rating.”

Question 24

T/F: The notice of sale is the advertisement placed by a municipality soliciting bids from underwriters for an issue it wishes to sell

Answer 24

True

>ad placed my municipality to solicit bids from underwriters

Question 25

The Trust Indenture Act of 1939 requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture. Are US treasuries exempt from this?

Answer 25

Yes

“The Trust Indenture Act of 1939 requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture. U.S. governments are exempt.”

Question 26

Under the intrastate offering rule (Rule 147), a resident of the state who purchases securities can resell them to a non resident after ___ months

Answer 26

6 months

“In an intrastate offering, a purchaser of the issue may not resell the securities to a resident of another state for at least six months after the purchase date.”

Question 27

Which method of evaluating municipal bids takes into account the time value of money:
True interest cost
Or
Net interest cost

Answer 27

True interest cost takes into account the time value of money

> The calculation of TIC (as opposed to net interest cost) takes the time value of money into account.

> The Municipal Securities Rulemaking Board has no requirement as to which method is used.

Question 28

T/F: Rule 506(b) has to do with summary prospectus for mutual funds.

Answer 28

False

Rule 506b is part of the private placement exemption under Regulation D

Question 29

T/F: In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. If the syndicate is not awarded the issue, the check is returned.

Answer 29

True

“In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. If the syndicate is not awarded the issue, the check is returned.”

Question 30

A legal contract—known as an indenture—between a bond issuer and a trustee appointed to represent the bondholders is required for corporate bond issues of $50 million or more sold interstate.

Answer 30

True

“The Trust Indenture Act of 1939 requires corporate bond issues of $50 million or more sold interstate to be issued under a trust indenture, which is a legal contract between the bond issuer and a trustee representing bondholders.”

Question 31

A legal contract—known as a legal opinion—between a bond issuer and a trustee appointed to represent the bondholders is required for corporate bond issues of $50 million or more sold interstate.

Answer 31

False
It’s the trust indenture that’s required for corp bond issues of $50 mil or more

“The Trust Indenture Act of 1939 requires corporate bond issues of $50 million or more sold interstate to be issued under a trust indenture, which is a legal contract between the bond issuer and a trustee representing bondholder”

Question 32

T/F: A negotiated bid underwriting is the standard for general obligation municipal bond underwritings

Answer 32

False

A competitive bid is standars for muni GO underwritings

Question 33

T/F: A competitive bid underwriting is the standard for general obligation municipal bond underwritings

Answer 33

True

“A competitive bid underwriting is the standard for general obligation municipal bond underwritings”

Question 34

T/F: An Eastern account has both undivided liability when purchasing the bonds from the issuer and undivided responsibility for bonds that remain unsold.

Answer 34

True

“An Eastern account has both undivided liability when purchasing the bonds from the issuer and undivided responsibility for bonds that remain unsold.”

Question 35

A legal contract—known as an indenture—between a bond issuer and a trustee appointed to represent the bondholders is required for

A)
corporate bond issues of $25 million or more sold interstate.
B)
government bond issues of any size sold to domestic (U.S.) investors.
C)
corporate bond issues of $50 million or more sold interstate.
D)
municipal bond issues of $100 million or more sold within one municipality.

Answer 35

C) corp bond issues of $50mil or more sold interstate

Question 36

Do the anti fraud provisions of the Securities Exchange Act of 1934 apply to commodities?

Answer 36

No

> commodities are not securities

Question 37

What is the most common order priority a syndicate would set for a muni bond issue?

Answer 37

Presale, group net, designated, member

Remember our abbreviation: PGDM (Pro Golfers Don’t Miss

Question 38

How do you remember the order allociation priority for muni bond issues?

Answer 38

Remember our abbreviation: PGDM (Pro Golfers Don’t Miss

Presale, group net, designated, member

Question 39

T/F: The order allocation priority for a new issue of muni bonds is set by the syndicate in advance

Answer 39

True
>set in advance
>order is: PGDM (pro golfers don’t miss)
>Presale, group net, designated, member

Question 40

“scale” in a muni bond underwriting

Answer 40

Listing by maturity of the price or yields at which a new issue will be offered
>Lists by maturity

“The scale, sometimes referred to as the reoffering scale, is a listing by maturity of the price or yields at which a new issue will be offered. A typical scale has earlier maturities with lower yields and later maturities with higher yields.”

Question 41

Scale in a municipal bond underwriting refers to

A)
yields by maturity.
B)
profit per bond.
C)
price by coupon.
D)
the order of the lowest net interest cost to the municipality.

Answer 41

a) Yields by maturity

Explanation
The scale, sometimes referred to as the reoffering scale, is a listing by maturity of the price or yields at which a new issue will be offered. A typical scale has earlier maturities with lower yields and later maturities with higher yields.

LO 20.b

Question 42

ABC Corporation has just completed an IPO raising $100 million. The investment bankers handling the offering made total commissions of $4 million. It is most likely that this was

A)
a standby underwriting.
B)
a best efforts underwriting.
C)
a firm commitment underwriting.
D)
an all or none underwriting.

Answer 42

b) best efforts underwriging

> Earned a COMISSION
Best efforts, no financial responsibility and they earn comission
(Standby underwriting only applies to rights)

Explanation
The key to the question is commissions. In a best efforts underwriting, the investment bankers have no financial responsibility and earn a commission on whatever they sell. In a firm commitment underwriting, the syndicate members have taken the financial responsibility and earn the spread (considered to be a markup rather than a commission). This would not be a standby underwriting because that applies to rights, and as an IPO, rights would not be applicable.

LO 20.b

Question 43

What kind of underwriting only applies to rights

Answer 43

A Standby underwriting

standby only applies to rights, not stock, bonds, etc

Question 44

Top Notch Securities is the managing underwriter for a new issue of 1 million shares of ABC common on a firm commitment basis. If part of the ABC issue remains unsold and results in a loss, the loss will be divided proportionately among

A)
the underwriting firms and the selling group firms.
B)
the underwriting firms.
C)
the selling group firms.
D)
the underwriting firms and the issuer.

Answer 44

B) underwriting firms
>firm commitment, losses divided by underwriter’s syndicate members

Explanation
In a firm commitment arrangement, any losses incurred are divided among the underwriters’ syndicate members according to the terms in the agreement among underwriters.

LO 20.b

Question 45

Which of the following is typically the largest component of a corporate underwriting spread and is received by members of the selling group?

A)
Manager's fee
B)
Underwriting fee
C)
Concession
D)
Reallowance

Answer 45

C) concession
>aka “selling concession”

Explanation
The concession tends to be the largest component of a corporate underwriting spread. That is paid to the members of the selling group. The manager’s fee is generally the smallest component.

LO 20.b

Question 46

T/F: Selling syndicate members use selling group members to expand their reach

Answer 46

True

“Selling syndicate members use selling group members to expand their reach”

Question 47

Regarding muni bond issues, selling syndicate members use ____ group members to expand their reach

Answer 47

Selling group members
>Selling group members recieve a selling concession (a comission) one each sale

> Selling group members have no financial commitment
they return unsold bonds to the syndicate member

Question 48

[muni bond issues] Syndicate members use selling group members to expand their reach. These selling group members recieve a comission known as a _____ _____ on each sale they make

Answer 48

Selling concession

> selling group members have no financial commitment
they return unsold bonds to syndicate member

Question 49

A firm underwriting of a municipal bond issue usually has a number of different broker-dealers involved. Those who earn a commission on each sale they make are performing in the role of

A)
the syndicate manager.
B)
a selling group member.
C)
a registered representative.
D)
a selling syndicate member.

Answer 49

B) Selling group member

Explanation
Selling syndicate members use selling group members to expand their reach. These selling group members receive a selling concession (a commission) on each sale they make. They have no financial commitment and return any unsold bonds to the syndicate member. Although registered representatives will typically earn a commission on the bonds they sell, the question asks about the broker-dealers involved in the underwriting. Be sure to answer the specific question asked.

LO 20.b

Question 50

T/F: regarding new muni bond issues, selling group members have a financial commitment on the bonds they don’t sell

Answer 50

False
>Selling group members have no financial commitment
>they return any unsold bond to the selling syndicate member

(selling group members hired by selling syndicate member to expand their reach)