101 Concepts for the Level I Exam

Concept 80: Mechanisms Available for Issuing Bonds in Primary Markets

Primary markets are markets in which bonds are sold for the first time by an issuer to raise capital. Bonds may be issued in the primary market through a public offering or a private placement.

Public offering: Any member of the public may buy the bonds. Four types are:

  • Underwritten offerings: The investment bank buys the entire issue and takes the risk of reselling it to investors or dealers.
  • Best effort offerings: The investment bank serves only as a broker and sells the bond issue only if it is able to do so. (Underwritten and best effort offerings are frequently used in the issuance of corporate bonds)
  • Shelf registrations: The issuer files a single document with regulators that allows for additional future issuances.
  • Auction: Price discovery through bidding. (It is frequently used in the issuance of sovereign bonds.)

Private placement: Securities are not sold to the public directly; instead the entire issue is sold to a qualified investor or to a group of investors (typically large institutions).