Module 6 Part 1

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  2. INVESTMENT BANKING is another name for UNDERWRITING. INVESTMENT BANKERS are firms that help corporations and municipalities raise necessary capital (money). In the case of a corporation, the money is used to fund growth and investment; in the case of a municipality, the money is used to build facilities or to improve services. The underwriting process or investment banking process matches corporations or municipalities that need money with investors who desire a return from their investment.
    If corporations or municipalities want to issue a debt security for a SHORT period of time (under 270 days), they may bring the security to market itself, or they may have a local firm sell the security through the money market sector of the securities market.

    If the issue is a LONG-TERM DEBT of a municipality or corporationOR if it is an equity issue for a corporation, an investment banker is retained to UNDERWRITE the issue and bring it to market. These investment bankers are also called UNDERWRITERS, and usually form what is called a SYNDICATE of other brokers/dealers to help sell the issue to investors.

    • The two major types of underwriting commitments from the underwriter to the issuer are:
    • Firm commitment
    • Best efforts commitment
    A FIRM COMMITMENT UNDERWRITING involves the underwriter’s promise to sell all of the new issue. The underwriter buys the issue from the issuer and then brings it to market to sell through the syndicate
    A variation of a firm commitment is a STANDBY UNDERWRITING. This is only used in a corporate offering of stock. Under this type of commitment, the underwriter is hired by the issuing firm to sell all the shares that are left over after a rights offering.

    Remember, a rights offering is when the issuing corporation offers the new shares to existing shareholders first. Those shares not purchased by the existing shareholders in a rights offering are sold to the standby underwriter and brought to market.
  6. WHEN, AS, AND IF ISSUED Stocks or Bonds
    Commonly known as WHEN ISSUED, are securities that are transacted on a conditional basis. The securities have been authorized and sold to the public (issued), but the certificates have not been issued. When issued securities can trade in the secondary market. The settlement date for a when issued stock is a date that is set by the underwriter, or lacking such date, is a date agreed upon between the issuer and the underwriter. Full payment could be required with one-day’s written notice. The "when issued" contract is marked to the market (the price is recalculated every day the market price of the bonds change) as provided for in the when issued contract. Stock splits and Treasury securities can be issued on a when issued basis.
    • For a new issue is when the issuer contacts either a single underwriter, or multiple underwriters, and asks them to sell the issue. The underwriter(s) or broker/dealers are not required to buy any shares they do not sell. The single underwriter forms a syndicate of other broker/dealers and tells the issuer that they “will do their best to sell the issue.” In a Best Efforts commitment underwriting, the issuer requires one of the following types of commitments from the syndicate:
    • All or none
    • •“Minimum-maximum”
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Module 6 Part 1
2013-01-14 21:41:28
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Module 1 Part 1
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