Module 6:Underwriting Quiz 2
Use the following stock offering to determine the amount the underwriting syndicate will receive per share for the amount of the issue sold by the selling group: •$45 million stock offering •Underwriter's participation of 100,000 shares •Management fees $0.10 •Underwriting fee $0.70 •Concession to the selling group $0.40 •Public offering price $15
$0.30. The syndicate will receive the entire underwriting fee on the stock that it sells. A selling group frequently assists the syndicate in placing the stock. A selling group member that sells some of the issue will receive the concession on each share sold. In this case, the concession to the selling group is $0.40. But remember that this concession to the selling group is a portion of the entire underwriting fee. The underwriting fee in this case is $0.70. So, if we take the underwriting fee ($0.70) and subtract the amount to be paid to the selling group ($0.40), we can determine that the underwriting syndicate member will receive $0.30 per each share of the offering sold by a selling group member. Even though these shares are not sold by the syndicate members themselves, the syndicate members receive the remainder of the underwriting fee not taken in the concession, because they made the financial commitment to sell the issue.
What does it mean when an unqualified legal opinion has been given on an issue?
No aspect of the issue could prevent its interest from being tax-exempt. The term "unqualified legal opinion" does not mean that a bond counsel is not qualified to give the opinion. It also has nothing to do with the tax code or the issue not being qualified for issue. A nonqualified legal opinion is given when the bond counsel believes that no aspect of the issue could prevent its interest from being tax-exempt. A qualified legal opinion given by a bond counsel indicates that some aspect of the issue may render the bond interest nonexempt from taxes.
The lead underwriter is entering a stabilizing bid for a new issue with a public offering price of $18. Which of the following will probably be the stabilizing bid?
$18. Stabilization takes place during the offering period. It is when the syndicate manager quotes a bid in the event any recent purchasers of the issue would like to liquidate their purchase. A stabilizing bid is always entered at or just below the public offering price. For the test, always select the public offering price if it is an available selection. In this case, the stabilizing bid is $18.
The lead underwriter is going to enter a stabilizing bid for a new issue with a public offering price of $26. Which of the following will probably be the stabilizing bid?
$26. Stabilization takes place during the offering period. It is when the syndicate manager quotes a bid in the event that any recent purchasers of the issue want to liquidate their purchase. A stabilizing bid is always entered at or just below the public offering price. For the test, always select the public offering price if it is an available selection. In this case, the stabilizing bid is $26.
A dealer is a member of a syndicate that is underwriting a $10 million municipal bond issue on a Western account basis. The dealer had agreed to sell $1 million worth of the issue, but thus far has only sold $700,000. $3.5 million of bonds remain unsold after two weeks of sales. The dealer still has selling responsibility for:
$3.5 million. This question is asking for selling responsibility, which is the remaining amount of the issue that must be sold. The selling responsibility remains the same, regardless of whether the underwriting agreement is an Eastern or a Western account. In both types of accounts, the selling responsibility is the remaining amount of the issue that must be sold.
A dealer is a member of a syndicate that is underwriting a $5 million municipal bond issue on a Western account basis. The dealer had agreed to sell $500,000, but thus far has only sold $200,000. $1.2 million of bonds remain unsold. If this situation were to remain unchanged until the close of the offering, the dealer will have a liability of:
$300,000. Remember -- in a Western account, there is undivided selling responsibility but divided liability. This question is asking about liability. With divided liability, if the entire issue is not sold, each syndicate member that sold all of the issue it committed to sell will not be liable for the unsold part of the issue (as in the Eastern account method). However, each syndicate member that does not sell the amount it committed to sell is liable for any of its unsold portion. In this case, the dealer has agreed to sell $500,000 worth of the issue, but has only sold $200,000 at the close of the offering. Therefore, the dealer will have a remaining liability of $300,000 worth of the issue.
Use the following stock offering information to determine what other compensation the underwriter received for the sale of the securities, excluding commissions. •$75 million stock offering •Underwriter's participation of 1 million shares •Management fees $0.20 •Underwriting fee $0.75 •Concession to the selling group $0.45 •Public offering price $25
$600,000. Since you are asked to exclude that portion of the compensation attributable to commissions, this question is actually asking how much the lead underwriter will receive for expenses. This is the $0.20 management fee per share. This is a $75 million stock offering with a public offering price of $25 per share. So, there are 3 million shares in this offering ($75 million offering divided by $25 per share). The management fees will then total $600,000 ($0.20 per share x 3,000,000 shares). All of the other fees constitute commissions.
The manager of a municipal joint account is a dealer who:
Acts for the underwriting group. The manager of the syndicate acts for the underwriting group. Syndicate managers can have the largest, smallest, or no position at all in the offering. However, they usually hold the largest position. The syndicate manager does not act for the issuer or provide the legal opinion. The bond attorney or bond counsel provides the legal opinion on a municipal issue.
A type of stock offering that returns all shares that are not sold to the issuing corporation is known as a:
Best efforts. In a best efforts offering, if a portion of the offering is not sold, it is returned to the issuing corporation. In a firm commitment offering, if a portion of the offering is not sold, the underwriters must purchase the remaining amount. In an all or none offering, all sales of the offering are conditional upon the entire offering being sold. If the entire offering is not sold, then the funds of all investors are refunded. A contingency offering may include a contingency in the financing that must be met in order for an underwriting to be effective. An all or none is a type of contingency underwriting.
When determining the public offering price for a new corporate offering, all of the following factors are taken into consideration, except: A. The dividends paid by the corporation B. The past earnings record of the corporation C. A comparison with other corporations in other industries D. Market conditions at the time the new issue is expected to be sold
Correct answer (false statement): A comparison with other corporations in other industries. Be sure to read each answer choice carefully. A comparison with other corporations in other industries is generally not a factor in determining the public offering price for a new corporate offering. A comparison with other corporations in the SAME INDUSTRY is usually taken into consideration when determining the public offering price for a new corporate offering. The dividends paid by the corporation, the past earnings record of the corporation, and market conditions at the time the new issue is expected to be sold are factors considered. Any factor that may influence the issue's secondary trading helps determine the value for the offering price when it comes out as a new issue.
All of the following statements are true of a red herring that can be sent to prospective buyers of a stock offering, except: A. It is used to obtain indications of interest. B. It does not contain the final offering price. C. There may be additional information added to it at a later date. D. A research report may be sent along with it.
Correct answer (false statement): A research report may be sent along with it. Research reports cannot be sent along with a red herring. A red herring is a preliminary prospectus that is sent to interested parties during the 20-day cooling off period. Red herrings are used to obtain indications of interest, they cannot contain the final offering price, and additional information may be added at a later date.
All of the following take place during the cooling-off period for a stock offering, except: A. The due diligence meeting B. Stabilization of the issue C. The issuance of a red herring D. Blue-skying the issue
Correct answer (false statement): Stabilization of the issue. Stabilization takes place during the offering period, not the cooling-off period. Stabilization is performed by the syndicate manager to prevent an underwritten stock from declining in the aftermarket. If newly issued stock declines in secondary trading, the price of the IPO is adversely affected. Please note: Stabilization can only take place during the offering period, which is after the cooling-off period. The due diligence meeting, the issuance of a red herring, and blue-skying the issue all take place during the cooling-off period.
The underwriting spread in a new corporate stock issue depends upon all of the following, except: A. The dollar amount of the issue B. The business and financial history of the corporation C. The type of corporation and the kind of industry it is in D. The dividends that will be paid to the stockholders
Correct answer (false statement): The dividends that will be paid to the stockholders. The amount of dividends to be paid has no bearing on the amount the underwriters make on the new offering. The underwriters are paid for what they do for the issuer in bringing the shares to market, not on how much the shareholders will be earning. The underwriting spread (compensation or sales charge paid to the underwriters) depends on the dollar amount of the issue, the business and financial history of the corporation, the type of corporation and the kind of industry the company is in, among other factors.
All of the following statements are correct concerning the underwriting of a new issue, except: A. Some underwriting agreements include a clause that relieves the underwriter of its obligation if certain circumstances are not met. B. The preliminary prospectus (red herring) contains all the relevant information, including the price of the issue, in order to obtain an indication of interest. C. The underwriting syndicate may engage in stabilization. D. Members of the underwriting syndicate who sell securities back to the manager of the syndicate during the underwriting period may be
Correct answer (false statement): The preliminary prospectus (red herring) will contain all the relevant information, including the price of the issue, in order to obtain an indication of interest. This is incorrect -- the red herring does not include the price of the issue. Some underwriting agreements do include a clause that relieves the underwriter of its obligation if certain circumstances are not met. This is called a MARKET OUT CLAUSE. The underwriting syndicate may engage in stabilization. Members of the underwriting syndicate who sell securities to customers who then sell the securities back to the manager of the syndicate during the underwriting period may indeed be penalized. When any of the new issue is sold back to the underwriter by purchasers of the new shares, the underwriter will penalize the syndicate via what is called a PENALTY BID. This results in the loss of the commission for the syndicate member on the portion of the issue returned.
Which two of the following are types of underwritings that can be agreed to between an issuer and a syndicate? I. Reserve underwriting II. Best efforts underwriting III. Firm commitment underwriting IV. Standard underwriting
II and III. Among others, best efforts and firm commitment underwritings are types of underwriting agreements. A best efforts underwriting is one in which the syndicate agrees to place as much of the issues as possible, but it is not obligated to purchase any remaining amounts that are not sold. In a firm commitment, the syndicate purchases the issue from the issuer and sells the issue. Reserve and standard underwritings are not recognized types of underwriting. Other types of underwritings that are not mentioned include an all or none underwriting and standby underwriting. An all or none underwriting is a form of best efforts underwriting that requires the issue be sold in its entirety or be cancelled. A standby underwriting is an underwriting of the leftover shares of stock in a rights offering.
Which two of the following would ordinarily be found in a municipal offering agreement among underwriters? I. Legal opinion II. Appointment of bond counsel III. Concession IV. Takedown
III and IV. Concession and takedown. An offering agreement among underwriters is also referred to as the agreement among underwriters, the account letter, the syndicate agreement, and the syndicate letter. This agreement outlines the terms under which the account will be managed. The only items found on this agreement are those pertaining to the underwriting -- such as levels of participation and the scale, which include the concession, takedown, manager's fee -- and any requirements by the lead manager of the syndicate. This agreement among the underwriters does not include the appointment of the bond counsel or its resulting legal opinion. The bond counsel is hired directly by the issuer.
A municipal underwriter is bidding on a general obligation serial bond in a net interest cost bid. Which two of the following are required to find the total interest cost? I. The par value of the bonds at issuance II. The dated date III. The nominal yield for each of the maturity years IV. The bond years
III and IV. The nominal yield for each of the maturities is important to the issuer to see what the yearly debt service will be. The bond years, calculated by taking all of the interest and the discount or premium included in the interest x the number of years, are also very important to the issuer. The par value at issuance is not needed, since the issuer will be getting a set amount. However, the par value at maturity is important as the issuer needs to know what will have to be paid at maturity. The dated date is not important for bidding on the bonds, but it is important for determining accrued interest to the first interest payment.
Who determines the tax-exempt status of a municipal bond?
IRS. The IRS determines the tax-exempt status of the bond. The bond counsel attests to the tax-exempt status of the bond. Remember -- the bond counsel is a lawyer knowledgeable in the laws of municipal bonds. The legal opinion by the bond counsel, in effect, states whether or not the bond is a legal municipal bond, and whether its interest can be expected to be exempt from taxes. Neither the SEC nor an underwriter has anything to do with the tax-exempt status of a bond.
The provisions for the allocation of funds of a revenue bond issue appear in the:
Official statement. How the funds raised are going to be used by the issuer of a revenue bond is provided in the official statement of the revenue bond. The official statement contains relevant information about the issue that an interested party would want to know. The allocation of the amount of bonds to be sold by each member is found in the syndicate agreement (letter). Offering circulars are used in conjunction with Regulation A offerings.
Municipal underwriters use many means of determining when to bring bonds to market and how much interest the bonds will bear. One of these calculations is the amount of newly issued bonds that are sold compared to the amount of new issues available in any one week. This comparison is called:
The placement ratio. This is the definition of the placement ratio, which is used by underwriters to see how well municipal bonds are selling as initial offerings. This is a weekly calculation that tells the underwriters the amount of bonds bought by customers as compared to how many were available.
