Issuance When a bond is issued, one issuer typically sells a large number of bonds at the same time. Sometimes every bond in the offering has the same issue date and the same maturity date. Other times, the issuer structures the maturities differently. Here are the main issuance formats you’ll see:
Term
All bonds are issued on the same day and mature on the same day
Example:
1,000 bonds issued January 1, 2023 1,000 bonds mature on January 1, 2033
Serial
All bonds are issued on the same day, but mature on different days
Example:
1,000 bonds issued on January 1, 2023 500 bonds mature on January 1, 2028 500 bonds mature on January 1, 2033
Series
Bonds are issued on different days, but all mature on the same day
Example:
500 bonds issued on January 1, 2023 500 bonds issued on January 1, 2028 1,000 bonds mature on January 1, 2033
Debt securities are structured in different ways depending on the issuer and the purpose of the financing. Most corporate and U.S. government bonds are issued in term format, while many municipal (city and state government) bonds are issued in serial format. Bonds that fund construction-related projects are commonly issued in series format. These are general patterns, and there are exceptions.
Sidenote
Balloon maturities Some bonds are issued with balloon maturities, which are a specific type of serial issuance. Like other serial offerings, all bonds are issued on the same date, but different portions mature at different times in the future. Balloon maturities are different because a large portion of the bonds mature at the final maturity date. For example:
2,000 bonds issued on January 1, 2023 250 bonds mature on January 1, 2026 250 bonds mature on January 1, 2029 1,500 bonds mature on January 1, 2032
Smaller portions are redeemed along the way, but the largest portion matures at the final redemption.
We’ll also learn how bonds are quoted in future chapters.
Quote
Provides trading information for a security
For example:
ABC stock trades at $150
XYZ bond trades at 105
Municipal bond trades at 4% yield
You don’t need to know why bonds are quoted differently yet. For now, focus on the idea that some bonds are quoted with prices and some are quoted with yields.
Price quote example
Bond trading at 95
Yield quote example
Bond trading at a 6% yield
These quotes describe different things:
A price quote refers to the bond’s price. For example, 95 means 95% of par. If par is $1,000, then 95% of par is $950. A yield quote refers to the bond’s yield, which is the overall rate of return on a bond.
Bonds issued in certain formats are commonly quoted in specific ways. Term bonds are most often quoted in price, also called percentage of par form. As described above, a bond quoted at 95 is trading at 95% of par, which is why it’s called a percentage of par quote. You may also hear this called a dollar quote or a term quote. Serial bonds are most often quoted in yield form. Yield quotes are also referred to as serial quotes and basis quotes. You may have heard of a basis point. A basis point equals 0.01%. In practice, basis points are often used to describe small changes in rates or performance. For example:
“The company’s revenues exceeded expectations by 50 basis points.”
That means the company exceeded revenue expectations by 0.50%. On the exam, you may see basis points written in a few equivalent ways:
1 basis point = 0.01% 100 basis points = 1.00%
When basis points are mentioned in a bond quote, they refer to the bond’s yield. That’s why yield quotes are sometimes called basis quotes.
Underwriting Underwriters market securities to the investing public on behalf of issuers (in the primary market). Issuers pay underwriters to help them raise capital by selling their securities. For example, the underwriters for Uber’s initial public offering (IPO) in 2019 collected over $100 million in fees. Many factors affect underwriting fees, and one major factor is the type of underwriting commitment. Underwriting commitments can be firm or best efforts. The key difference is who ends up with any unsold securities. For example, if an underwriter tries to sell $100 million of bonds but only sells $75 million, who keeps the remaining $25 million? If a bond is issued on a firm commitment basis, the underwriter keeps the unsold securities. In this arrangement, the underwriter pays the issuer (typically close to the full offering amount) and then tries to profit by reselling the bonds to customers. If any bonds go unsold, the underwriter is stuck with them. If a bond is issued on a best efforts basis, the issuer keeps the unsold securities. The underwriter earns an underwriting fee for each unit sold, but doesn’t have to buy or hold any unsold shares or bonds. Firm commitments are riskier for underwriters, so they typically come with higher underwriting fees than best efforts commitments. As with other areas of finance, taking on more risk generally requires higher compensation.
Key points
Term issuance
All bonds issued and mature on the same day
Typical issuers:
Corporations
US government
Type of quote:
Price quotes
Dollar quotes
Percentage of par quotes
Term quotes
Serial issuance
All bonds are issued on the same day, but mature on different days
Typical issuers:
Municipalities
Type of quote:
Yield quotes
Basis quotes
Serial quotes
Series issuance
Bonds are issued on different days, but all mature on the same day
Typical issues:
Construction-related projects
Basis points
Formal measurement of percent
1 basis point = 0.01% 100 basis points = 1%
Firm commitment underwritings
Underwriter keeps unsold securities
Riskier for underwriter
Larger fees for underwriters
Best efforts commitment underwritings
Issuer keeps unsold securities
Riskier for the issuer
Smaller fees for underwriter
Issuance When a bond is issued, one issuer typically sells a large number of bonds at the same time. Sometimes every bond in the offering has the same issue date and the same maturity date.