Chapter 1 The new issue market

Question 1

What does the primary market refer to?

Answer 1

The sale of securities to the investing public in issuer transactions

Question 2

What is an initial public offering (IPO)?

Answer 2

The first time any shares have been issued to raise new capital for the issuer

Question 3

Can an issuer have more than one primary offering?

Answer 3

Yes, open-end investment companies can issue new shares daily

Question 4

What is a follow-on offering?

Answer 4

An additional primary offering (APO) of new shares by an issuer

Question 5

How can you identify a primary offering?

Answer 5

If the funds wind up in the coffers of the issuer

Question 6

Is the resale of treasury stock considered a primary offering?

Answer 6

No, because those shares were previously owned

Question 7

What is the secondary market?

Answer 7

The market where further buying and selling of securities takes place after the primary market

Question 8

Who are the main participants in a new issue?

Answer 8

The entity selling the securities and the broker-dealer acting as the underwriter

Question 9

What document must the issuer file with the SEC unless exempt?

Answer 9

A registration statement

Question 10

What does the SEC look for in the registration statement?

Answer 10

Sufficiency of investment information

Question 11

What is due diligence in the context of underwriting?

Answer 11

Preliminary studies and investigations about a corporation and a proposed new issue

Question 12

What must investment bankers examine during the due diligence of a municipality?

Answer 12

• Use of the proceeds
• Financial analysis and feasibility studies
• Company’s stability
• Whether the risk is reasonable

Question 13

What is an underwriter?

Answer 13

A broker-dealer specializing in investment banking and underwriting new issues

Question 14

What is the role of the underwriting manager?

Answer 14

To direct the underwriting process and sign the underwriting agreement with the issuer

Question 15

What is a syndicate in underwriting?

Answer 15

A group of underwriters formed to purchase a new issue of securities from the issuer

Question 16

What is a firm commitment offering?

Answer 16

Where syndicate members commit to purchase and distribute an agreed-on amount of the issue

Question 17

What is the difference between negotiated underwriting and competitive bid underwriting?

Answer 17

Negotiated underwriting involves negotiation of terms, while competitive bid involves bidding for the lowest net interest cost

Question 18

What does net interest cost (NIC) measure?

Answer 18

The total proceeds the issuer receives combined with the total coupon interest paid

Question 19

What is true interest cost (TIC)?

Answer 19

A cost comparison adjusted for the time value of money

Question 20

What is the financial liability of syndicate members in a firm commitment?

Answer 20

They take on financial liability and act in a principal capacity

Question 21

What is the purpose of a selling group?

Answer 21

To help distribute the securities without financial commitment

Question 22

What is a best efforts arrangement?

Answer 22

The underwriter acts as an agent, selling as much as possible without financial liability for unsold shares

Question 23

What is an all-or-none (AON) underwriting?

Answer 23

An agreement where the underwriter must sell all the shares or cancel the underwriting

Question 24

What is a mini-max offering?

Answer 24

A best efforts underwriting with a minimum and maximum amount of securities to be sold

Question 25

What is required for a municipal underwriting syndicate to formalize their relationship?

Answer 25

Signing a syndicate letter or syndicate contract

Question 26

What are the two types of syndicate accounts?

Answer 26

* Western accounts (divided) * Eastern accounts (undivided)

Question 27

What is the primary difference between Western and Eastern accounts?

Answer 27

Western accounts are divided; each underwriter is responsible for its own allocation

Question 28

What is a standby underwriter?

Answer 28

An underwriter that agrees to purchase all shares not subscribed to by current stockholders

Question 29

What type of account is an undivided account?

Answer 29

An undivided account is an Eastern account.

Question 30

What happens to an underwriter's financial liability after the issue has been substantially distributed?

Answer 30

Each underwriter is allocated additional bonds representing its proportionate share of any unsold bonds.

Question 31

In a Western account, what is the liability of an underwriter who has sold its entire allocation?

Answer 31

No remaining liability.

Question 32

In an Eastern account, how is the unsold amount divided among syndicate members?

Answer 32

Based on their initial participation.

Question 33

What is the purpose of a syndicate's bid to the issuer?

Answer 33

To win the right to represent the new issue in the primary market.

Question 34

What is the goal of the syndicate during their meetings to establish a bid?

Answer 34

To arrive at the best price to the issuer while still making a profit.

Question 35

What is the term used for the process of establishing the reoffering yield for each maturity?

Answer 35

Writing the scale.

Question 36

What must competitive bids be submitted as?

Answer 36

Firm commitments.

Question 37

What do syndicate members receive as compensation for underwriting the new issue?

Answer 37

The spread.

Question 38

What is the typical range for the good-faith deposit required from syndicates?

Answer 38

1%–2% of the total par value of the offering.

Question 39

What is the maximum length of time for the syndicate account to exist after the issuer delivers the securities?

Answer 39

30 calendar days.

Question 40

What is the reoffering price?

Answer 40

The price at which the bonds are sold to the public.

Question 41

What is the term for the portion of the spread remaining after subtracting the management fee?

Answer 41

Total takedown.

Question 42

What is the discount that selling group members receive from syndicate members called?

Answer 42

Selling concession.

Question 43

What is the term used for the discount offered to firms not in the syndicate or selling group?

Answer 43

Reallowance.

Question 44

True or False: The manager's fee is typically the largest portion of the spread.

Answer 44

False.

Question 45

What is the order period in municipal underwritings?

Answer 45

The time set by the manager during which the syndicate solicits customers for the issue.

Question 46

What type of order is entered before the syndicate wins the bid?

Answer 46

Presale order.

Question 47

What type of order is placed after the bid is awarded and benefits the entire syndicate?

Answer 47

Group net order.

Question 48

What is the lowest priority for orders in a syndicate?

Answer 48

Member and member-related orders.

Question 49

What does PGDM stand for in order allocation priorities?

Answer 49

Presale, Group, Designated, Member.

Question 50

What must syndicate members do when placing an order for a related account?

Answer 50

Disclose this fact to the syndicate manager.

Question 51

What is the liability for a syndicate member who commits to $500,000 of bonds but sells $300,000 when $1 million remains unsold?

Answer 51

$100,000.

Question 52

Fill-in-the-blank: The difference between the reoffering price and the amount bid on an issue is called the _______.

Answer 52

spread.