There is a certain process of offering these bonds for the first time in the primary bond market. The process of offering bonds to the public are similar to the offering of the stock. For the purpose of offering bond in the primary market, a company or a firm needs to take help of an investment bank.
The investment bank provides all the necessary experience and expertise for the purpose. The investment bank provides its suggestions regarding the creation of the issue. At the same time, the bank also provides an estimate of the expected yield from the issue. The maturity period of the bond is also suggested by these banks. The bank also helps in selling the bonds in the primary bond market. At the same time, the bank may also purchase the whole issue through firm commitment underwriting.
For the marketing of the new issue in the primary bond market, the investment bank uses its own network. The bank forms a syndicate or at certain times, forms a selling group, to sell the bonds to the investors through the primary bond market. The institutional investors or the individual investors lends their money to the particular company through these bonds. Once these are purchased from the primary bond market, these can be further traded in the secondary bond market.
These bonds provide a fixed income source to the investor. At the same time, the offering companies or the government also gets the very necessary money for their projects.
Issuing of bonds:
The issuing methods for government and non-government bonds differ considerably on the primary market.
In general,
Public Placement
Public placement is when an issue of bonds is offered to institutional and individual investors through a securities house.
Private Placement
Private placement is when an issue of bonds is offered to a limited number of investors.
Issuing Government Bonds
Issue Form
Most government bonds are issued in book-entry form. This means that there is no certificate of ownership. Instead, transactions are recorded in the issuer's and investor's accounts or by a clearing house.
Issue Method
Government bonds are generally issued by auction. Auctions are typically dominated by specialist government bond dealers, whose job it is to distribute government bonds on the primary market and make secondary markets.
There are two types of auction:
Single price
Some primary markets issue government bonds in single-price auctions. In traditional auctions, prices rise and items are sold to the highest bidders. In single-price auctions, prices fall and bonds are sold to all bidders at the same price – the highest accepted yield bid or the lowest accepted price bid that will clear the auction.
In a single-price auction, the authority in charge of selling government bonds sets an exceptionally high price per bond. It then lowers the price until someone bids. It continues to lower the price until someone else bids, and so the process continues until the entire issue has been spoken for.
Bidders are allocated the bonds for which they bid. However, they all pay the lowest bid price per bond – the price submitted by the last bidder.
Example
Let's say the first bidder bid USD 99 per bond, the second bidder bid USD 98.80 per bond, and the last bidder bid USD 98.75 per bond.
All bidders would be sold the bonds at USD 98.75 regardless of how much they bid.
Multiple price
Most government bonds are issued in multiple-price auctions.
In a multiple price auction, the issuer accepts the best bids until the issue is fully allocated. Bidders are awarded bonds at the price they bid. The prices bid by other participants and the minimum price are not known. In this way, multiple price auctions encourage higher bids.
At multiple-price auctions, bids can be placed on a price basis or on a yield basis and can be competitive or non-competitive.
Issuing Non-Government Bonds
SMALL ISSUES
On the primary market, small issues of non-government bonds are usually sold by private placement. With private placement, the issuer, or an agent acting on behalf of the issuer, offers the bonds to a limited number of investors.
Private placements are less expensive than public placements and avoid delays and legal complications.
LARGE ISSUES
On the primary market, large issues of non-government bonds are generally sold by public placement. With public placement, issues are distributed to an unlimited number of investors by one or more investment banks acting on behalf of the issuer.
Most bonds on the primary market are issued by public placement.
STAGES IN ISSUANCE OF NON-GOVT BONDS
The investment bank provides all the necessary experience and expertise for the purpose. The investment bank provides its suggestions regarding the creation of the issue. At the same time, the bank also provides an estimate of the expected yield from the issue. The maturity period of the bond is also suggested by these banks. The bank also helps in selling the bonds in the primary bond market. At the same time, the bank may also purchase the whole issue through firm commitment underwriting.
For the marketing of the new issue in the primary bond market, the investment bank uses its own network. The bank forms a syndicate or at certain times, forms a selling group, to sell the bonds to the investors through the primary bond market. The institutional investors or the individual investors lends their money to the particular company through these bonds. Once these are purchased from the primary bond market, these can be further traded in the secondary bond market.
These bonds provide a fixed income source to the investor. At the same time, the offering companies or the government also gets the very necessary money for their projects.
Issuing of bonds:
The issuing methods for government and non-government bonds differ considerably on the primary market.
In general,
- government bonds are issued by auction, and
- non-government bonds are issued by public placement or private placement .
Public Placement
Public placement is when an issue of bonds is offered to institutional and individual investors through a securities house.
Private Placement
Private placement is when an issue of bonds is offered to a limited number of investors.
Issuing Government Bonds
Issue Form
Most government bonds are issued in book-entry form. This means that there is no certificate of ownership. Instead, transactions are recorded in the issuer's and investor's accounts or by a clearing house.
Issue Method
Government bonds are generally issued by auction. Auctions are typically dominated by specialist government bond dealers, whose job it is to distribute government bonds on the primary market and make secondary markets.
There are two types of auction:
Single price
Some primary markets issue government bonds in single-price auctions. In traditional auctions, prices rise and items are sold to the highest bidders. In single-price auctions, prices fall and bonds are sold to all bidders at the same price – the highest accepted yield bid or the lowest accepted price bid that will clear the auction.
In a single-price auction, the authority in charge of selling government bonds sets an exceptionally high price per bond. It then lowers the price until someone bids. It continues to lower the price until someone else bids, and so the process continues until the entire issue has been spoken for.
Bidders are allocated the bonds for which they bid. However, they all pay the lowest bid price per bond – the price submitted by the last bidder.
Example
Let's say the first bidder bid USD 99 per bond, the second bidder bid USD 98.80 per bond, and the last bidder bid USD 98.75 per bond.
All bidders would be sold the bonds at USD 98.75 regardless of how much they bid.
Multiple price
Most government bonds are issued in multiple-price auctions.
In a multiple price auction, the issuer accepts the best bids until the issue is fully allocated. Bidders are awarded bonds at the price they bid. The prices bid by other participants and the minimum price are not known. In this way, multiple price auctions encourage higher bids.
At multiple-price auctions, bids can be placed on a price basis or on a yield basis and can be competitive or non-competitive.
Issuing Non-Government Bonds
SMALL ISSUES
On the primary market, small issues of non-government bonds are usually sold by private placement. With private placement, the issuer, or an agent acting on behalf of the issuer, offers the bonds to a limited number of investors.
Private placements are less expensive than public placements and avoid delays and legal complications.
LARGE ISSUES
On the primary market, large issues of non-government bonds are generally sold by public placement. With public placement, issues are distributed to an unlimited number of investors by one or more investment banks acting on behalf of the issuer.
Most bonds on the primary market are issued by public placement.
STAGES IN ISSUANCE OF NON-GOVT BONDS
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