Fixed Income - Fixed Income Section 1
36. What is the role of investment banks in a best effort offering for a bond issue?
- Option : B
- Explanation : In best effort offering, the investment bank sells the bond on commission basis. Contrary to an underwritten offering, where the investment bank commits to selling 100% of the issue, in a best effort offering issue, it only sells as many securities as it can.
- Option : B
- Explanation : Using a financial calculator, compute the present value as: N = 5, I/Y = 9%, PMT = $9, FV = $100, CPT PV = ($100). Since the coupon rate is equal to the market discount rate, the bond is priced at par.
- Option : A
- Explanation : Using a financial calculator, compute the present value as: N = 4 * 2 = 8, I/Y = 12/2 = 6%, PMT = $10/2 = 5 and FV = $100, CPT PV = ($93.79). Since the coupon rate is lower than the market rate, the bond is priced at discount
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