New Issues

Treasury Notes, Treasury Bonds, TIPS and STRIPS--how often are they auctioned?

Treasury Notes, Treasury Bonds, TIPS and STRIPS are auctioned monthly.

Which statement is TRUE? A. The proceeds from a primary distribution go to the issuer while the proceeds from a secondary distribution go to a selling shareholder B. Primary distributions cannot be purchased on margin while secondary distributions can be purchased on margin C. There is no limitation on the size of a primary distribution while secondary distributions have caps on the maximum permitted sale D. Primary distributions must be made at the POP (Public Offering Price) while secondary distributions must be "at the market" offerings

The best answer is A. Underwritten offerings can be primary or secondary offerings (or both at the same time!). Assume that a privately held company wants to go public. The company wants to raise $300,000,000. To do this, the company will be issuing $150,000,000 of new shares (this is the primary portion of the distribution, where the proceeds of the sale go to the issuer) and another $150,000,000 consists of shares being sold by officers and directors of the company (who now want to cash out some or all of their investment in the company). The proceeds from the secondary portion go to the selling shareholders. This is a combined primary and secondary offering. All shares are sold with a prospectus at the POP and full payment is required (which is the case for any prospectus offering).

A U.S. soft drink manufacturer buys a French soft drink manufacturer. This is a: A. horizontal merger B. vertical merger C. diagonal merger D. foreign exchange

The best answer is A. A horizontal merger is where 2 companies in the same industry merge, usually to achieve economies of scale.

All of the following activities are prohibited during the "cooling off" period EXCEPT: A. accepting an indication of interest from the customer for part of the issue B. confirming a certain amount of the issue to a customer C. accepting a check from a customer for the part of the issue D. accepting an order for the issue in registration

The best answer is A. During the cooling off period, an offer or sale of the issue is prohibited. Sending a preliminary prospectus or accepting an indication of interest does not constitute an "offer" under the Act of 1933. Accepting an order, confirming a certain amount of the issue, or accepting a check from a customer are all considered to be "sales" and are prohibited until registration is effective.

In a best efforts underwriting, the underwriter is acting as a(n): A. agent B. principal C. dealer D. specialist (DMM)

The best answer is A. In a best efforts underwriting, the underwriter promises to use his or her best efforts to sell the issue but takes no financial liability. Thus, this is an agency relationship. In contrast, firm commitment underwritings are principal relationships.

An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Farm Credit System bonds with a 10 year maturity. An investor who purchases the new issue can expect to pay: A. par value B. par value less a discount C. par value plus a mark-up D. par value plus a commission

The best answer is A. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. In contrast, direct U.S. Government obligations are sold through auction.

A primary dealer buys Treasury Securities in a competitive bid at the weekly Treasury Auction. Settlement between the dealer and the Treasury occurs: A. on issue date B. the next business day after issue date C. the next business day after the auction D. 5 business days after issue date

The best answer is A. Primary U.S. Government dealers are obligated to bid in the weekly Treasury Auctions. The auctions are conducted each Monday and Tuesday. The issue date of the securities set at the following Thursday. If a primary dealer wins the bid, settlement is made with the Treasury on issue date - that is Thursday.

The managing underwriter has set the POP for a new issue offering at $50 per share. After negotiating, the proceeds to be received by the issuer upon closing are set at $48 per share. The managing underwriter will retain a management fee of $.25 per share and the selling concession has been set at $.75 per share. The spread is: A. $2.00 B. $1.25 C. $1.00 D. $.25

The best answer is A. This one is pretty simple. The "spread" is the gross compensation to the underwriters. It is the difference between the POP (Public Offering Price) and the amount per share that was received by the issuer. In this case, the POP is $50, and the issuer received $48 per share, so the spread is $2.

The issuance of junk bonds, with the proceeds used to make a tender offer for a publicly held company, is known as a: A. spin off B. leveraged buy out C. credit enhancement D. break up

The best answer is B. In a leveraged buy out, an investor group identifies a publicly held company whose shares are underpriced; or one that it believes can be managed more effectively; and arranges for financing (usually from a commercial bank or by issuing junk bonds) to make a tender offer for all of the company's outstanding shares. Given that the existing shareholders tender their shares, the company now is owned by the investor group; who installs a management team that will run the company more efficiently; and who will sell off underperforming corporate assets; using the proceeds to pay off the loan. At a later date, after the company is "cleaned up," the company may be resold to the public in a managed underwriting.

A preliminary prospectus may first be sent to a customer: A. prior to the filing of a registration statement with the SEC B. once the registration statement has been filed with the SEC C. once a final price amendment has been filed with the SEC D. once registration is effective

The best answer is B. A "red herring" preliminary prospectus may be sent to any prospective purchaser of that new issue once the issue has entered into the "20-day cooling off" period that commences upon filing of the registration statement with the SEC.

Which statement is NOT TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering? A. The indication is not binding on the customer B. The indication is binding on the underwriter C. The indication may be changed or canceled by the customer D. The indication may be changed or canceled by the underwriter

The best answer is B. An indication of interest is taken during the 20-day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These indications are not binding on either party because the issue cannot be legally "offered or sold" until the effective date.

An underwriting commitment where the underwriter is liable for any unsold securities is a(n): A. Best Efforts underwriting B. Firm Commitment underwriting C. Agency relationship D. Best Efforts-Mini Max underwriting

The best answer is B. In a firm commitment underwriting, the underwriter buys the issue outright from the issuer, with the intention of reselling the issue to the public at a profit. Thus, the underwriter is a principal in the transaction, and is taking full financial liability. Best efforts under writings often come with contingencies but these are agency transactions.

The Federal Reserve conducts Treasury Bill auctions: A. Daily B. Weekly C. Quarterly D. Annually

The best answer is B. The Federal Reserve conducts weekly auctions for 4, 8, 13, and 26 week T-Bills and monthly auctions for 52 week T-Bills. The auction takes place on either Monday or Tuesday. The T-Bills are issued to the winning bidders and must be paid for on the Thursday immediately following the auction date.

In which of the following types of underwriting commitments are the underwriters acting as agents? A. Firm B. Best Efforts C. Bought deal D. Stand-By

The best answer is B. The types of underwriting commitments are: Firm commitment (underwriter acts as principal), Best Efforts, Best Efforts-All or None (underwriter acts as agent in both), and Stand-By (underwriter acts as principal to buy unsubscribed shares in a rights offering from the issuer).A "bought deal" is a slang term for a type of firm commitment offering.

An automobile manufacturer decides to distribute shares of its parts making subsidiary to existing shareholders as a separate operating company. This is a: A. break up B. spin off C. fall out D. leveraged buy out

The best answer is B. This company is "spinning off" a subsidiary to its shareholders as a separate stock company. Larger companies do this when they feel that the subsidiary will be better managed; and have better business opportunities; as a legally separate operating company. Do not confuse a "spin off" with a "break up." A "break up" is a government ordered splitting up of a company; usually as a result of the company engaging in monopolistic practices.

In a registered secondary distribution, which statement is FALSE? A. The offering is made at the POP B. The purchaser must receive a prospectus C. The proceeds from the sale go to the issuer D. The issue cannot be purchased on margin

The best answer is C. Underwritten offerings can be primary or secondary offerings (or both at the same time!). Assume that a privately held company wants to go public. The company wants to raise $300,000,000. To do this, the company will be issuing $150,000,000 of new shares (this is the primary portion of the distribution, where the proceeds of the sale go to the issuer) and another $150,000,000 consists of shares being sold by officers and directors of the company (who now want to cash out some or all of their investment in the company). The proceeds from the secondary portion go to the selling shareholders. This is a combined primary and secondary offering. All shares are sold with a prospectus at the POP and full payment is required (which is the case for any prospectus offering).

Which statement is TRUE regarding bids placed at the Treasury Auction? A. Competitive Bids are filled at inferior yields B. Negotiated Bids are filled at superior yields C. All filled bids receive the same yield D. Only the highest interest rate bids are filled

The best answer is C. At the weekly Treasury auction, non-competitive bids are always filled at the average winning yields of the competitive bids. Only the lowest interest rate competitive bids are filled; the higher rate competitive bids that exceed the amount of securities up for auction that week are rejected. All filled bids receive the same yield.

Payment for U.S. Government securities that are sold through auction is made on: A. Auction Date B. Auction Date + 1 C. Issue Date D. Issue Date + 1

The best answer is C. Payment for U.S. Government securities that are won at auction must be made on issue date (Thursday of the auction week for T-Bills and the 15th of the month for STRIPS, TIPS, Treasury Notes, and Treasury Bonds). Payment is to be made in cash, Federal Funds, or in similar maturing Government securities (effecting a direct "rollover" of that debt).

Stand-by underwritings are a type of: A. firm commitment underwriting used in initial public offerings B. best efforts underwriting used in initial public offerings C. firm commitment underwriting used in rights offerings D. best efforts underwriting used in rights offerings

The best answer is C. Stand-by underwritings are used in connection with rights offerings. If all of the new shares are not subscribed by the existing shareholders, the issuer has an underwriter stand-by on a firm commitment basis to purchase any unsubscribed shares. Thus, the issuer is assured of selling all of the new shares.

A preliminary prospectus: A. contains a link to the latest research report on the issuer B. contains the public offering price of the issue C. contains the financial statements of the issuer D. contains sales projections of competitors

The best answer is C. The preliminary prospectus contains the financial statements of the issuer. It does not contain the Public Offering Price - this is not set by the underwriters until just before the offering is made. Thus, it is found only in the Final Prospectus. Offering documents do not typically contain forward looking projections on competitors or links to research reports.

New issue agency securities are sold: A. by competitive bid at auction B. by non-competitive bids placed with the Federal Reserve C. through a selling group of broker-dealers assembled by the agency D. through commercial banks and savings and loans

The best answer is C. Whereas government securities are sold at auction conducted by the Federal Reserve, agency securities are sold to the public through a selling group of broker-dealers assembled by the agency. This is done on a negotiated basis, with the group consisting mainly of primary government dealers.

All of the following are primary purchasers of Treasury securities EXCEPT: A. Commercial banks B. Broker-dealers C. Investment companies D. Federal Reserve Board

The best answer is D. Commercial banks and broker-dealers bid at Treasury auctions to buy securities for their inventories. Investment companies such as government bond mutual funds and unit investment trusts bid at auction to buy large blocks of Treasury securities directly, bypassing a dealer or broker and therefore saving commissions or markups. The Federal Reserve Board is not a primary purchaser of Treasury securities - it does not bid at Treasury auctions. However, it does trade them in the secondary market to influence the availability of credit.

What can be given to a client during the 20-day cooling off period for a new securities offering? A. Prospectus B. Advertisement C. Recommendation D. Red Herring

The best answer is D. When a new issue is "in registration" during the 20-day cooling off period, the SEC reviews the filing for full and fair disclosure. This is the "quiet period" during which the issue cannot be advertised, recommended or sold. The only permitted communication is a preliminary prospectus, also called a red herring (because it has a red disclaimer stating that it is not an advertisement). The red herring does not include the final POP, but it can have an estimated price range. The final POP is not set until the very end of the 20-day cooling off period.

In a new corporate bond offering, the lead underwriter selects syndicate members based upon all of the following factors EXCEPT: A. geographic location B. track record C. financial capability D. trade execution capability

The best answer is D. When selecting underwriters in a corporate offering, the manager will consider the track record of that firm in previous underwritings; whether the firm has sufficient capital to handle its portion of the offering; whether the firm has participated in underwritings with that manager in the past; and the geographic location of the syndicate members. Geographic location is important because the manager wants to reach as many potential investors as possible. Trade execution capability is not a consideration for the manager, since this is a new issue being sold via prospectus. Trade execution capability is the ability to execute a trade completely (as opposed to a partial trade), in a timely fashion, and at the best price.

All of the following statements are true about the activities of an investment banker EXCEPT the investment banker: A. helps the issuer structure the offering, advising on the type and amount of securities to be sold B. analyzes the prospects for the industry in which the issuer operates before handling the offering C. can either act as an agent or principal in an underwriting D. can accept time deposits from customers who buy new issue offerings

The best answer is D. Investment bankers can not accept deposits nor make commercial loans to customers. These activities can only be performed by commercial or savings banks. Investment bankers help structure new securities offerings; decide the pricing on the issue based on market conditions; and act as either principals (firm commitment) or agents (best efforts), handling the offering.

To satisfy MSRB disclosure requirements for new municipal issues, a customer would be provided with a copy of the: A. legal opinion B. official notice of sale C. prospectus D. official statement

The best answer is D. The Official Statement is the disclosure document for new issue municipal bonds. If it is prepared by the issuer, it must be distributed to all purchasers by the underwriters at, or prior, to settlement.