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FRM Part I · FRM Exam Part I · Corporate Bonds

A corporation wants to sell a new bond issue to a broad group of institutional investors and expects to raise a large amount with the help of investment banks that will take on the distribution. Which description best fits the typical primary-market process for a public corporate bond offering?

In a typical public corporate bond offering, an underwriting syndicate of investment banks buys the bonds from the issuer under a firm commitment and resells them to investors, earning a spread. Rating agencies only assess credit quality; they do not set coupons or allocate bonds.

  1. AThe issuer sells directly to the central bank at a fixed price without any underwriters
  2. BUnderwriters form a syndicate, commit to buy the bonds from the issuer, and resell them to investorsCorrect
  3. CThe bonds are first listed on an exchange and the issuer waits for investors to place bids at any price
  4. DThe rating agency sets the coupon rate and allocates the bonds to investors

Explanation

In a typical underwritten public offering, an investment bank or syndicate buys the bonds from the issuer (firm commitment) and resells them to investors, earning the underwriting spread. Rating agencies assess credit quality but do not set coupons or allocate bonds. Issuers do not normally sell to central banks at fixed prices.

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