NEW ISSUES
Is a government ordered splitting up of a company; usually as a result of the company engaging in monopolistic practices.
"Break Up"
The ___________ is used during the 20- day cooling off period to solicit indications of interest in the issue. This helps the underwriters gauge public interest in the issue; and helps the underwriters to set the final Public Offering Price.
"Red Herring"
A _________________ shows the GROSS proceeds of a new issue offering
"Tombstone Announcement"
A ___________________ is published once a new issue's registration is effective. Under SEC rules, the announcement is very limited in scope, since it cannot be considered to be an "offer or advertisement," as these can only be made through the prospectus.
"Tombstone Announcement"
The good faith check that must be deposited by interested bidders is typically:
1% or 2% of the par value of the bonds.
The types of underwriting commitments are:
1. Firm commitment (underwriter acts as principal), 2. Best Efforts, Best Efforts-All or None (underwriter acts as agent in both), 3. Stand-By (underwriter acts as principal to buy unsubscribed shares in a rights offering from the issuer).
The information in the Tombstone is limited to:
1. Name of issuer 2. Names of underwriters 3. Type of security 4. The public offering price of the security 5. The aggregate public offering price of the issue 6. Nature of the issuer's business Any additional information is not allowed.
The normal priority for handling municipal new issue orders is:
1. Pre-Sale Net 2 Group Net 3. Designated Net 4. Member Takedown.
What is included in a competitive bid:
1. Stated rates of interest 2. Premiums or discounts 3. Dollar amount of bid Interest rates to be printed on the bonds are in the bid. Also included are any premiums or discounts from par specified in the bid; the total dollar amount being bid; and the Net Interest Cost (if it is an NIC - Net Interest Cost bid) or the True Interest Cost (if it is a TIC - True Interest Cost bid).
When making a bid for an issue, municipal underwriters would consider:
1. The maturities of the bonds 2. The current yields of similar bonds in the market 3. Type of bonds being offered (e.g., are they G.O., revenue, special tax, etc.). - Note, The par value of the bonds has no bearing on the interest rates to be bid.
What information would be found in the Official Notice of Sale?
1. par value of the bonds 2. maturities of the bonds 3. income source backing the bonds The Official Notice of Sale gives the basic information needed to bid on a new bond offering. Included is the type of bond, dollar amount of each maturity, the names of the bond counsel and authorized person to conduct the bond sale at the township, among numerous other items such as the dated date of the issue (the date from which interest will start accruing) and the award date - the date that the winning bid will be announced. - Reoffering yield of the bonds ARE NOT found in the Official Notice of Sale.
New issues are not marginable for _______ days under Federal Reserve Board rules
30 days
A ________________ account is divided as to selling responsibility and divided as to liability. This contrasts to an Eastern syndicate account which is undivided as to selling responsibility and undivided as to liability.
A Western syndicate account
A municipal syndicate member takes a 10% participation in a $2,500,000 underwriting in a Western Account. At the termination of the offering, this member sold its entire participation, but $250,000 of bonds remains unsold in the syndicate account. The member's remaining liability is: A. 0 B. $25,000 C. $225,000 D. $250,000
A. 0 A Western Syndicate is divided as to selling responsibility and liability. This member took 10% of a $2,500,000 underwriting for a $250,000 commitment. Since this member sold its entire $250,000 commitment, it has no remaining liability.
Municipal financial advisors: I are hired by the municipal securities issuer II are hired by the municipal securities purchaser III render advice on the structure of a new municipal issue IV render advice on the structure of a municipal investment portfolio A. I and III B. I and IV C. II and III D. II and IV
A. I and III Financial advisors to municipalities are municipal broker-dealers familiar with the municipal marketplace. The financial advisor helps a municipality structure a competitive bid offering, receiving a fee from the municipality for this service.
In a leveraged buy out: I a public company is taken "private" II a private company is taken "public" III financing for the takeover is provided by a commercial bank or by issuing junk bonds IV financing for the takeover is provided by issuing common stock A. I and III B. I and IV C. II and III D. II and IV
A. I and III 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.
Which of the following must be disclosed to customers in competitive bid municipal underwritings? I Spread II Initial reoffering yield III Participation amount of each underwriter IV Names of the Underwriters A. II only B. I and II C. III and IV D. I, II, III, IV
A. II only
Stand-by underwritings are a(n): A. firm commitment underwriting B. best efforts underwriting C. all or none underwriting D. agency underwriting
A. firm commitment underwriting
New issue municipal "group" orders are filled:
After pre-sale orders, but before designated orders.
Investment bankers sell securities for issuers on an ____________ basis
Agency
Best efforts and all or none are types of underwritings where the underwriter is not liable for any unsold shares - the underwriter is acting as ________ for the issuer helping in the sale of the offering.
Agent
In a best efforts underwriting, the underwriter is acting as a(n):
Agent 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.
The contract among members of an underwriting syndicate that establishes the rights, duties, and commitments of each with respect to a new issue of municipal securities being underwritten is the:
Agreement among underwriters
This is also known as the syndicate agreement. It establishes the syndicate account as either an Eastern or Western account and sets the terms for the running of the syndicate. It is signed by each syndicate member.
Agreement among underwriters
Stabilizing bids can only be entered:
At, or below, the Public Offering Price - never above
A syndicate member in a Western account takes $3,000,000 out of a $15,000,000 underwriting. At the termination of the syndicate, $4,000,000 of the issue remains unsold while the member sold $2,200,000. This syndicate member's remaining liability is: A. $300,000 B. $800,000 C. $1,000,000 D. $1,800,000
B. $800,000 A Western syndicate account is divided as to selling responsibility and divided as to liability. The member is only responsible for what the member was supposed to sell. The member is initially responsible for $3,000,000 - since the member sold $2,200,000, the member is only responsible for $800,000 of the $4,000,000 that remains unsold.
During the 20-day cooling off period when a non-exempt new issue is in registration, which of the following is permitted? A. Sale of the issue to interested parties B. Distribution of a preliminary prospectus C. Recommendation of the purchase of the issue D. Solicitation of orders to buy the issue
B. Distribution of a preliminary prospectus During the 20-day cooling off period that follows the registration statement filing with the SEC, an offer or sale of the issue is prohibited. Soliciting or accepting an order, confirming a certain amount of the issue, recommending the security, or accepting a check from a customer are all considered to be "sales" and are prohibited (until registration is effective).
A syndicate member places an order for a new issue municipal offering, that, if filled, will be placed in a municipal bond fund managed by that member. This order is: I "member-related" II "non-member related" III filled first, as non-public orders take precedence IV filled last, as public orders take precedence A. I and III B. I and IV C. II and III D. II and IV
B. I and IV
Which of the following statements are TRUE regarding new issue U.S. Government and Agency securities? I U.S. Government securities are sold at auction conducted by the Federal Reserve II U.S. Government securities are sold through a selling group III Agency securities are sold at auction conducted by the Federal Reserve IV Agency securities are sold through a selling group A. I and III B. I and IV C. II and III D. II and IV
B. I and IV
A municipal bond dealer gives a quote on a new issue 20 year, 4% General Obligation bond. The quote includes a 20 basis point mark-up. Because of the mark-up, which statements are TRUE? I The dollar price of the bond will increase II The dollar price of the bond will decrease III The yield of the bond will increase IV The yield of the bond will decrease A. I and III B. I and IV C. II and III D. II and IV
B. I and IV Any "mark-up" of a new issue purchased by a dealer at a net offering price less a concession, as defined by the MSRB as any remuneration in addition to the concession received by the dealer as a result of increasing the offering price on the securities. If the offering price of the bond is increased, the yield on the bond must decline.
Which of the following statements are TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering? I The indication is binding on the customer II The indication is binding on the underwriter III The indication may be changed or canceled by the customer IV The indication may be changed or canceled by the underwriter A. I and II B. III and IV C. I and IV D. II and III
B. III and IV These are not binding because the issue cannot be legally "offered or sold" until the effective date, so they can be changed or canceled by the customer or the underwriter during the "cooling off" period..
"The manager will credit each syndicate member based on sales of the issue allotted to that member and such credits extinguish liability solely of that member." The paragraph above would be found in a(n): A. Eastern syndicate agreement B. Western syndicate agreement C. Bid Form D. Official statement
B. Western syndicate agreement A Western syndicate account is a fully divided account. It is divided as to selling responsibility; and it is divided as to liability. Since sales of bonds by the syndicate member are used to offset liability only of that member, this is a divided, or Western Account.
A divided municipal syndicate sells $4,000,000 of bonds out of a $4,500,000 offering. When the manager disbands the syndicate, the unsold bonds will be: A. returned to the issuer B. confirmed to each syndicate member that did not sell its allotment C. confirmed to all syndicate members on a pro-rata basis D. retained by the manager for distribution through a joint account
B. confirmed to each syndicate member that did not sell its allotment In a divided (Western) syndicate, each member takes a preset dollar amount of the issue. If any one syndicate member undersells, he is responsible for his unsold amount. For example, if a syndicate member takes $500,000 out of a $5,000,000 underwriting and only sells $400,000, the member is responsible for the other $100,000.
The contract between an issuer and a bidder to buy a municipal issue is called the:
Bid Form The bid form really is an uncompleted contract to buy the bonds. The bidder signs the form when the bid is submitted. If the bid is won, the issuer's representative signs the form accepting the bid at the stated terms and deposits the good faith check. This is the completed contract to buy the bonds.
Corporation "A" wishes to acquire the publicly held stock of Corporation "B," a company with a market capitalization of $300 million. Corporation "A" does not have the cash necessary to complete the purchase since it only has a free cash balance of $100 million. To finance the additional $200 million needed for the acquisition via a leveraged buy out: A. the assets of Corporation "A" would be pledged as collateral for the purchase of Corporation "B" B. the assets of "B" would be pledged as collateral for the purchase of Corporation "B" C. Corporation "A" would borrow from a large financial institution D. Corporation "B" would borrow from a large financial institution
C. Corporation "A" would borrow from a large financial institution Leverage is the use of debt to finance a purchase. Corporation A needs an additional $200 million to buy the stock of Corporation B. To do so, it would borrow the money from a large bank.
When selecting syndicate members for a new corporate bond offering, the managing underwriter will consider the potential member's: I financial capability to handle its portion of the offering II track record in past underwritings III geographic location IV back-office capability A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
C. I, II, III 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, so that the broadest customer base can be reached.
An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Home Loan Bank bonds with a 20 year maturity. The new issue of Federal Home Loan Bank Bonds will be sold: A. through competitive bid at the weekly Treasury Auction B. directly by the Federal Home Loan Bank to interested investors C. through a selling group appointed by the Federal Home Loan Bank D. through the "Dutch" auction method that awards the bonds to the lowest rate bidders at an "average" winning rate
C. through a selling group appointed by the Federal Home Loan Bank Government agency securities are underwritten via negotiated offerings; not via competitive bid as is the case with U.S. Government issues. The agency assembles a selling group through which it offers the securities. It negotiates both the interest rate placed on the issue based upon the level of pre-sale orders received by the selling group; and the selling concession paid to the selling group for offering the securities to the public.
Regarding new municipal offerings, School district municipal bond issues are usually offered through ___________ bids and Authority municipal bond issues are usually offered through _________ underwritings.
Competitive Bids Negotiated Underwritings Most general obligation issues are sold through competitive bid while revenue bond issues are typically sold through negotiated offerings. School district bond issues are general obligation bonds. Authority bond issues, such as a turnpike authority or a bridge authority, are revenue bonds.
New U.S. Government agency securities are: I underwritten via competitive bid II underwritten via negotiated offering III offered through the Federal Reserve IV offered through selling groups A. I and III B. I and IV C. II and III D. II and IV
D. II and IV Government agency securities are underwritten via negotiated offerings; not via competitive bid as is the case with U.S. Government issues. The agency assembles a selling group through which it offers the securities. It negotiates both the interest rate placed on the issue based upon the level of pre-sale orders received by the selling group; and the selling concession paid to the selling group for offering the securities to the public.
All of the following items are associated with a competitive bid offering of General Obligation bonds EXCEPT: A. Official Notice of Sale B. Official Statement C. Legal Opinion D. Prospectus
D. Prospectus The best answer is D. In a competitive bid offering of municipal bonds, the issuer solicits bids on the issue by placing an Official Notice of Sale in the Daily Bond Buyer. Once the bid is awarded, the bonds are printed with the winning interest rates and delivered to the winner, who pays the issuer for the securities. The securities are then reoffered by the winning syndicate. New issue disclosure on municipal bonds is given through the Official Statement; there is no prospectus requirement since these issues are exempt from the Securities Act of 1933.
All of the following are reasons why the good faith check may be returned EXCEPT the: A. issuer rejects all bids B. check is improperly prepared C. underwriter loses the bid D. underwriter wins the bid
D. underwriter wins the bid If the underwriter wins the bid, the issuer keeps the good faith check and applies it to the balance due, once the bonds are printed and ready for delivery. The check will be returned if it is improperly prepared or if the bid is rejected.
The amount of the good faith check is determined by the ______________ and this is set forth in the _______________. The good faith check amount that must be deposited by interested bidders is typically 1% or 2% of the par value of the bond
Determined by the Issuer and is set forth in the Official Notice of Sale
A primary U.S. Government securities dealer purchasing T-Bills for its inventory account would most likely buy the bills:
Directly from the U.S. Treasury at the weekly yield auction
A undivided syndicate is also known as:
Eastern
In an ______________ account, the member gets credit for all bonds sold; but agrees to share liability for all unsold bonds pro-rata with the other syndicate members.
Eastern
"The manager will credit each syndicate member based on sales of the issue allotted to the member and such credits extinguish liability against all securities that remain unsold by all members." The paragraph above would be found in a(n):
Eastern Syndicate Agreement
An undivided syndicate is known as an:
Eastern syndicate
_________________ are used by the underwriter to gauge investor interest in the issue, and to help establish the proper Public Offering Price for the securities.
Indications of Interest
When Investment banks underwrite securities on a principal basis, this is a _____________ commitment.
Investment banks underwrite securities on a firm commitment (principal) basis
The issuance of junk bonds, with the proceeds used to make a tender offer for a publicly held company, is known as a:
Leveraged Buyout
_____________________ give an opinion on the validity, legality and tax exempt status of a new municipal issue. They do not give an opinion of the fairness of the yield on that issue (remember, lawyers do not give economic opinions).
Municipal bond counsels
A syndicate member in a municipal underwriting wishes to place an order for the new issue bonds with the manager. The bonds are to be purchased for the member's own portfolio. Under MSRB rules, an order for such a "related portfolio:"
Must be disclosed to the manager as such at the time that the order is entered
At the weekly Treasury auction, _________ bids are always filled ________________ 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.
Non-competitive bids are always filled at the average winning yields of the competitive bids
The NET proceeds received by the issuer after the underwriter's spread is paid is found on:
On the front cover of the prospectus.
An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Home Loan Bank bonds with a 20 year maturity. An investor who purchases the new issue of Federal Home Loan Bank bonds can expect to pay:
Par
The __________________ contains the financial statements of the issuer. It does not contain the Public Offering Price - this is not known until just before the offering is made, and is only found in the Final Prospectus.
Preliminary Prospectus
The financial statements of the issuer can be found in the:
Preliminary Prospectus
In a divided (Western) syndicate, each member takes a:
Preset dollar amount of the issue.
Investment bankers purchase securities from issuers on a _____________ basis.
Principal
In a firm commitment underwriting, the underwriter is acting as a(n):
Principal 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.
In order to solicit competitive bids for a new bond issue, the municipality will:
Publish an Official Notice of Sale in the Bond Buyer Municipalities publish an "Official Notice of Sale" that gives the details of a new bond issue that the municipality will put up for auction in the near future. This is published in the Bond Buyer, and often in local newspapers as well. Any interested potential bidders can contact the municipality for more detailed information by requesting a copy of the "Preliminary Official Statement" - the disclosure document for municipal new issues.
In NEGOTIATED municipal underwritings, the__________ and _______________ of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters or their participation amounts.
Spread and Offering price of each maturity
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
Stand-by Underwritings
What does "undivided" mean pertaining to Eastern syndicates?
That each syndicate member's gain or loss is based on the performance of the total syndicate account - not on the performance of that syndicate member.
A new issue municipal bond investor seeking information about an issuer's financial condition would examine the:
The Official Statement The Official Statement is the disclosure document, similar to a prospectus, for new municipal issues. Prospectuses are only required for non-exempt new issues under the Securities Act of 1933. Since municipals are exempt, there is no prospectus requirement. There is no legal requirement for issuers to prepare an Official Statement, but underwriters require them from issuers in order to perform due diligence on the issue; and to have a disclosure document that can be given to potential investors.
What must be disclosed to customers in COMPETITIVE bid municipal underwritings?
The Reoffering yield and Resultant dollar price.
In new stock offerings, the issuance of new stock are sold under a _________ and sold at the ___________.
Under a Prospectus and Sold at the Public Offering Price.
A ____________ is where companies in 2 different (but usually related) industries merge, for some business benefit
Vertical Merger. Example : An ice cream manufacturer buys a dairy farm.
The Federal Reserve conducts Treasury Bill auctions _____________ on Monday and Tuesday. The Bills are issued to the winning bidders, and must be paid for, on the ____________ immediately following the auction date.
Weekly and must be paid for on the Thursday immediately following the auction date.
In a ___________________account where each member is only liable for a pre-set dollar amount; and this dollar amount is the maximum that he or she can sell as a syndicate member.
Western (divided syndicate)
When investment baker underwrites securities on an agency basis, this is what type of commitment?
best efforts (agency) basis.
Stand-by underwritings are a type of:
firm commitment underwriting used in rights offerings
In new stock issues, the Public Offering Price is inclusive of:
inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.
