Question

6. A company is selling $50 million in new bonds. ML Inc. the managing underwriter has 40 per cent participation in the syndicate it has formed. The syndicate will buy the bonds from the company at $986 per bond. And sell them to the public for $996 each. The selling concession will be $5 per bond. The issue will generate administrative expenses of $100,000. ML requires a manager's fee of 12 percent of the gross spread. How much will ML receive if the issue is a sell out?

Answer 1

Price at which Syndicate will buy Bonds from Company = $ 986

Price at which Bonds will be sold to public (net of selling concession) = $996 - $ 5 = $ 991

Total spread in the issue for ML = $991 - $986 = $ 5 per $ 1000 or $ 5/1000 x $ 50 Mn = $ 250000

ML has 40 % share in syndicate, so gross spread for ML is $ 250000 x 40% = $ 100000

ML’s share of administrative expenses = $ 100000 x 40% = $ 40000

Manager’s fee ML will receive = 12% of ($996 - $ 986)/1000 x $ 50 Mn = $ 60000

Total amount ML will receive , if the issue is a sell out will be $ 100000 - $ 40000 + $ 60000

= $ 120000 in total.