11 True or False? (20 points) (1) Investment bank Stockman Saks underwrote the I
ID: 2818506 • Letter: 1
Question
11 True or False? (20 points) (1) Investment bank Stockman Saks underwrote the IPO of QuickChat. The issue was a flop; as soon as trading started, the stock price went down, and it closed the day well below its offering price of 18/share. Two million shares were initially sold, although underwriter Stockman Saks had a greenshoe option to buy an additional 15% of stock from the company, with an underwriting spread of 5.50%, the underwriting fee charged by Stockman Saks was €2,277,000. Is this last statement true or false? [5 points] (2) Most bond offerings are arranged in public issues involving investment banks as underwriters. This is a mistake because private placements are less costly than public issues. Is this last statement true or false? [5 points] (3) Company C has defaulted on 600 million of bonds. At the time of the credit event, its bonds were valued at 27.5% of face value. Therefore, the total amount received by protection buyers was €165 million. Is this last statement true or false? [5 points] (4) The treasurer of Bank B thinks that the cost of interbank lending will increase to a level that is much higher than currently reflected in markets. She should hedge the bank's funding costs by buying short-term interest rate futures. Is that last statement true or false? [5 points]Explanation / Answer
1. In the IPo, 2 million shares are sold at a offered price of €18. Company receives € 36 million from the IPO. and the underwritng spread is 5.5%. The Underwritng fee is 5.5% * 36 million = € 1.98 million.
Hence the Underwriting fee mentioned in the question is False.
2. Private placements and public offerings are the key methods to raise the money for company. Both have their own merits and de-merits. The cost involves for the private placement is less compared to the public offering. Since in private placement you directly speak to the respective client and then set a deal but in the public offering you need to go through a systematic procedure which involves lot of cost. and you can raise money quicker with the private placements. Hence the statement mentioned in the question is true.
3. Company C defaulted € 600 million of bonds. But at the time of credit even it is valued only 27.5% of its face value. 27.5% * 600 million = € 165 million which is received by the protection buyers. Last statement is True.
4. The Statement is false.
When interest rates are rising, banks need to hedge the funding cost by shorting interest-rate futures not by buying. By this it will make money.
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