Primary and Secondary Markets

Just to post some excerpts I read from a book.

The primary market for debt (newly created debt securities) functions in a manner similar to the primary market for equities. Typically an investment banker (IB) is involved in advising the debt issuer and and in distributing(selling)the debt securities to investors.

When the IB actually purchases the entire issue and resells it, they are said to have underwritten the issue. This arrangement is termed firm arrangement while the deal is termed a bought deal.

In an underwritten offering of debt securities, the underwriter will typically put together a syndicate of many IBs to aid in distributing the securities. The underwriters can reduce their risk by preselling as much of the offerings as possible to their institutional clients and hedging the interest rate risk exposure of the issue for the period they anticipate holding owning the securities.

An alternative is for the IB to agree to sell all of the issue that they can and this is termed doing the offering on a best efforts basis.

In the above described process, since the price paid for the issue and the anticipated sale price is determined between the IB and the issuing company, the offering is termed negotiated offering.


And more....