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Underwriting

bonds and securities

UNDERWRITING, in finance, a method of floating the bonds and securities of large cor porations by means of fiscal agents or syndi cates. The general rule governing the under writing of new securities is that the syndicates shall receive a commission of cent on the value of the securities underwritten. As an il lustration take a railroad issuing $50,000,000 of bonds. The railroad, it may be presumed, is of good standing, and the security excellent. The company prefers, instead of securing a high premium on the bonds, to save in the annual in terest charges. So it issues a 3Y2 per cent bond, with the probability that it will sell at par, or perhaps higher. The underwriters agree to take the entire issue, say at 98, but it charges a com mission of 5 per cent. or about $2,500,000, for labor, expense and risk attending the operation. The railroad is now secure. It is assured of the money it needs for which it has, indeed, paid a liberal discount, but no more liberal, pro portionately, than would be required in procur ing a modest loan in the ordinary market chan nels. The syndicate must now sell the bonds.

If there is an active investment demand, it may be able to accomplish this at once, at a considerable advance over the underwritten price of 98. Suppose it sells at 102, the syndi cate would then reap a profit of 4 per cent, or $2,000,000 in addition to the commission of $2,500,000, less, however, the cost of advertising, wages, attorneys' fees and other incidentals. But if the demand were not as great as had been anticipated, the syndicate might find itself with millions of dollars of securities on its hands, for which it must pay, but for which there is no adequate market.