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Series 7 > ch 20 > Flashcards

ch 20 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

mini max

A

A mini-max agreement is a type of best efforts underwriting agreement. In a best efforts agreement, the underwriters are not purchasing unsold shares from the issuer. There are two components to a mini-max agreement. The first sets a floor, or minimum, amount the issuer needs to raise to move forward with the underwriting, and the other sets a ceiling, or maximum, dollar amount of securities the issuer is willing to sell.

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2
Q

official statement

A

The official statement, which is the disclosure document used in new municipal offerings, will describe the issue’s financial condition in detail.

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3
Q

total takedown

A

The total takedown has two components: concession and additional takedown.

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4
Q

good faith deposit

A

In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. If the syndicate is not awarded the issue, the check is returned. If the syndicate is awarded the issue, the money is applied against the payment. However, if the syndicate fails to carry out the provisions of the underwriting, the money is retained by the issuer. If you have ever bought or sold a house, this is comparable to the earnest money deposit turned in by the buyer with the offer.

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5
Q

Rule 144

A

Restricted shares under Rule 144 are considered illiquid until the restriction is lifted. They may never be used to cover short calls because the shares, due to the restriction, could not be sold if the owner of the calls were to exercise the right to buy the stock. There is a de minimis exemption from the filing of a Form 144, but that is limited to 5,000 shares.

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6
Q

Eastern syndicate/account

A

In an undivided (Eastern) syndicate, each member is responsible for its portion of the offering regardless of how many bonds it has already placed. If the member was liable for 10% of the issue’s original dollar value, it is committed to take down 10% of any bonds remaining unsold (10% of $1 million equals $100,000).

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7
Q

competitive bid bond sale

A

In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the 6% coupon on the bonds.

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8
Q

primary market

A
  • issuer transactions: the issuer receives the the proceeds generated by the sale of securities
  • these shares have never been issued to the public before
  • IPO
  • Additional Primary Offering (APO): authorized but unissued shares. Follow on offering
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9
Q

secondary market

A
  • nonissue transactions: proceeds go to investors rather than the issuer
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10
Q

new issue participants

A
  • issuer
  • underwriter
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11
Q

issuer

A
  • firm selling securities to raise money
  • must file a registration statement with the SEC.
    • supply sufficient info about security and corporation
      - 20 cooling off period while SEC reviews
      - SEC foes not guarantee adequacy of the prospectus
  • after SEC review, the underwriter holds DD meeting
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12
Q

underwriter

A
  • BD specializing in investment banking
  • act as principal and take on financial liability
  • functions might include:
    - best ways to raise long term cap
    - raising cap for issuers by distributing new securities
    - buying securities from issuers and reselling them to the public
    - dustributing large blocks of stocks to the public and institutions
    - helping issuers comply with securities laws
  • holds DD meeting (prelim studies, investigations, research, meetings and compilations of info about corp and new issue)
  • must conduct formal DD to provide info on issuer’s financial background, intended use of proceeds
  • for muni revenue bonds, DD includes a feasibility study
  • do not loan money
  • underwriters of corporate securities must be FINRA members
  • underwriters of muni securities must be MSRB members
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13
Q

underwriting manager or syndicate manager

A
  • investment banker who negotiates with the issuer
  • responsible for keeping the books and managing the account
  • settlement is 30 calendar days after the issuer delivers the securities to the syndicate
  • max length of time for the syndicate to exist is 30 calendar days
  • there can be more than 1 manager
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14
Q

syndicate

A
  • group of underwriters foamed to purchase/underwrite a new issue
  • organized to share risks, obtain sufficient cap, and broaden distribution channel
  • make financial commitment
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15
Q

firm commitment offering

A
  • all syndicate members commit to purchase from the issuer and then distribute an agreed on amount of the issue
  • most common
  • underwriters assume financial risk
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16
Q

syndicate agreement or letter

A
  • describes the syndicate members responsibilities and allocation of profits
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17
Q

negotiated underwriting

A
  • issuer and investment banker negotiate the offering terms including amount of securities to be offered, offering price or yield and underwriting fees
  • standard in corp securities
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18
Q

competitive bid underwriting

A
  • standard for GO muni securities, often required by state law
  • invite investment bankers to bid for new issue
  • issue awards the securities to the underwriter whose bid results in the lowest net interest cost (or true cost) to the issuer
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19
Q

net interest cost (NIC)

A
  • calculation used to compare bids
  • combines amount of proceeds the issuer receives with the total coupon interest it pays
  • lowest NIC wins
20
Q

true interest cost (TIC)

A
  • same as NIC but adjusted for the time value of money
21
Q

selling group

A
  • members act as agents with no commitment to buy securities
  • no financial liability
  • selling group agreement:
    • statement that the manager acts for all underwriters
      - amount of securities each selling group member will be allocated, tentative public offering price
    • proportion of the underwriting spread/concession
      - provisions for how and when payments are made
      - legal provisions on liability
22
Q

standby agreement

A
  • unique to corp rights offerings
  • when current stakeholders do not exercise preemptive rights in an additional offering, the underwriter is standing by to pruchase remaining shares
  • type of firm commitment
23
Q

best efforts

A
  • underwriter sells as much as possible without financial liability for what remains unsold
  • acting as agent with no financial risk
  • several types: all or none, mini-max
24
Q

all or none best efforts

A
  • underwriter must sell all of the shares or cancel the underwriting
  • funds collected during the offering period are held in escrow
25
Q

mini-max best efforts

A
  • sets a floor or minimum (least amount the issuer needs to raise to move forward with the underwriting) and ceiling or maximum ( dollar amount the issuer is willing to sell)
  • often used for LP offerings
  • funds collected during the offering period are held in escrow
26
Q

muni underwriting syndicate

A
  • considers:
    • potential demand
    • presale orders
    • liability
    • scale and spread
    • ability to sell issue
27
Q

muni syndicate letters

A
  • each member firm’s level of particiaptation or commitement
  • priority of order allocations
  • duration of the syndicate acount
  • appointment of manager
  • fee for managing underwriter and breakdown of spread
  • other obligations - deposits, terms, liability for unsold bonds
  • not binding until the syndicates submits the bid
28
Q

western account

A
  • divided account
  • each underwriter is only responsible for its now allocation
29
Q

eastern account

A
  • undivided account
  • each underwriter is allocated a portion of the issue, but unsold bonds are the responsibility of the entire syndicate, proportional to their commitment
30
Q

breakdown of the spread

A
  • syndicate’s compensation based on proportion of participation
  • proceeds to the issuers are the offering price minus the spread
  • production: total dollar sales earned from a muni issue. Production minus the amount bid for the issue results in the spread

spread = management fee + concession + additional takedown

31
Q

syndicate management fee

A
  • per-bond fee for their work
  • 1/8 point ($1.25) fee from total spread of 1 point ($10)
  • smallest portion of the spread
32
Q

total takedown

A
  • portion of the spread that remains after subtracting the management fee
  • members buy bonds from the syndicate manager at the takedown
  • largest portion of the spread

total takedown = concession + additional takedown

33
Q

selling concession

A
  • selling group firms buy the bonds from syndicate members at the concession
  • discount
34
Q

additional takedown

A
  • syndicate members keep the remainder of total take down after concession
  • part of total take down
35
Q

order allocation

A
  • bond orders are allocated according to priorities set by syndicate
  • must be submitted in writing
  • Presale orders, group net order, designated order, then member order and member related order
36
Q

order period

A
  • time set by manager for syndicate to solicit customers and al orders are allocated without regard to the sequence they were recieved
  • one hour following the award of the bid
37
Q

presale order

A
  • entered before the syndicate wins the bid
  • customer doesn’t know final price or if syndicate will win bid
  • top priority
  • individual syndicate members aren’t credited with any takedown, split according to participation
38
Q

group net order

A
  • order is placed after bid is awarded
  • priority after presale orders
  • takedown is split among syndicate members according to participation
39
Q

designated order

A
  • institutions that want to allocate takedown to certain syndicate members
40
Q

member order and member related order

A
  • lowest priority
  • member firm order for its own inventory or related accounts
41
Q

Municipal bond underwriting terms

A

Municipal bond underwriting terms may be set by the issuer as either competitive bid or negotiated for both GO and revenue bond issues.

42
Q

prospectus

A
  • The prospectus is a legal document and may not be altered.
  • The prospectus will include an overview and history of the business, as well as any risks associated with it. It is the SEC disclaimer that is on the front cover and it is the effective date, not the date of filing that is shown.
  • A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers.
43
Q

Scale in a municipal bond underwriting

A

The scale, sometimes referred to as the reoffering scale, is a listing by maturity of the price or yields at which a new issue will be offered. A typical scale has earlier maturities with lower yields and later maturities with higher yields.

44
Q

syndicate’s bid

A

A syndicate’s bid is based on the average reoffering price (the price the public will pay) less the syndicate’s spread (the amount the syndicate will charge for bringing the issue to market).

the average reoffering price minus the spread

45
Q

(SEC) has the authority to

A

During the cooling-off period, the SEC reviews registration statements and can issue stop orders if the registration is not complete or was not filed properly. The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public.

Series 7 (19 decks)

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