Definition:
A presold issue refers to a scenario where an entire issuance of municipal bonds or government bonds is sold out to investors before the official public announcement of the price or yield. This is often facilitated through preliminary sales efforts targeted primarily at institutional investors, who might be given an advanced opportunity to purchase these bonds.
Examples
- Municipal Bond Offering: A city government planning to raise funds for infrastructure projects issues a batch of municipal bonds. The bonds are completely bought by major financial institutions before the details are made public.
- Treasury Bonds: The federal government announces a new issuance of treasury bonds. Due to strong demand from pension funds and large banks, the bonds are sold out before the official pricing is revealed to the general market.
Frequently Asked Questions (FAQs)
Q1: Why might bonds be presold?
Answer: Preselling bonds allows issuers to secure funding quickly and potentially at favorable terms due to a guaranteed buyer base, reducing market risk.
Q2: Who are the typical buyers in a presold issue?
Answer: Institutional investors such as mutual funds, pension funds, insurance companies, and large banks.
Q3: What are the benefits for investors in purchasing presold issues?
Answer: Investors can lock in the purchase of potentially high-demand bonds and may receive favorable terms due to their advance commitment.
Q4: How does preselling affect the market?
Answer: It can lead to less price discovery in the retail market since many bonds are acquired by institutions before they are available to the general public, potentially resulting in higher prices for subsequent buyers.
Q5: Is preselling common in all bond markets?
Answer: Preselling is more common in markets where quick absorption of large bond issuances is crucial, such as in government and municipal bond markets. It is less common in smaller or more speculative debt markets.
- Municipal Bonds: Bonds issued by local government entities to fund public projects.
- Government Bonds: Bonds issued by national governments to finance public spending and obligations.
- Institutional Investors: Organizations such as banks, insurance companies, and pension funds that have large amounts of capital to invest.
- Bond Yield: The return an investor realizes on a bond.
Online Resources
Suggested Books for Further Studies
- “Bonds: The Unbeaten Path to Secure Investment Growth” by Hildy Richelson and Stan Richelson
- “The Bond Book” by Annette Thau
- “Municipal Bonds: The Comprehensive Review of the Industry” by Neil O’Hara
Fundamentals of Presold Issue: Finance Basics Quiz
### What is a presold issue in the context of municipal or government bonds?
- [ ] An issue that fails to generate sufficient interest.
- [ ] A bond issue that is not supported by institutional investors.
- [x] An issue completely sold out before the public announcement of price or yield.
- [ ] A bond exclusively sold to retail investors.
> **Explanation:** A presold issue is an issuance of municipal or government bonds completely sold out before the pricing or yield details are publicly announced.
### Who are the typical buyers in a presold issue?
- [ ] Individual retail investors.
- [x] Institutional investors such as mutual funds or banks.
- [ ] Small private companies.
- [ ] Real estate developers.
> **Explanation:** Institutional investors, such as mutual funds, pension funds, and banks, are typically the buyers in a presold issue.
### What is an advantage for issuers in having a presold issue?
- [x] Secures funding quickly with guaranteed buyers.
- [ ] Increases public awareness.
- [ ] Causes delays in funding.
- [ ] Reduces the number of buyers.
> **Explanation:** Issuers benefit from a presold issue as it secures funding quickly, often with guaranteed buyers, thereby reducing market risk.
### How might presold issues affect bond prices in the secondary market?
- [ ] Lower prices for subsequent buyers.
- [x] Higher prices for subsequent buyers.
- [ ] No effect on prices.
- [ ] Prices will fluctuate unpredictably.
> **Explanation:** Presold issues can lead to higher prices for subsequent buyers in the secondary market because the initial demand has already absorbed a significant portion of the issue.
### What does 'yield' in bond terminology refer to?
- [ ] The initial price paid for the bond.
- [x] The return an investor realizes on the bond.
- [ ] The face value of the bond.
- [ ] The issuance cost of the bond.
> **Explanation:** Yield refers to the return that an investor earns on the bond, often expressed as an annual percentage rate.
### Which entity is more likely to engage in preselling bonds frequently?
- [ ] Small business owners.
- [ ] Individual retail investors.
- [x] Government entities.
- [ ] Real estate developers.
> **Explanation:** Government entities often engage in preselling bonds to ensure quick absorption and secure favorable terms.
### What is a typical use of funds raised through municipal bonds?
- [ ] Paying salaries to government employees.
- [x] Funding public infrastructure projects.
- [ ] Purchasing commercial real estate.
- [ ] Speculative investing in the stock market.
> **Explanation:** Municipal bonds are typically issued to raise funds for public infrastructure projects such as roads, schools, and utilities.
### What risk do investors face with presold issues?
- [x] Potential lack of price discovery.
- [ ] Lack of bond rating information.
- [ ] Higher default risk.
- [ ] Increased market liquidity.
> **Explanation:** Investors in presold issues may face a lack of price discovery since the bonds are sold out before public pricing, affecting subsequent trading prices.
### Presold issues provide early purchase opportunities primarily for which group?
- [x] Institutional investors.
- [ ] Individual retail investors.
- [ ] Independent traders.
- [ ] Real estate agents.
> **Explanation:** Institutional investors, like mutual funds and pension funds, are typically offered early purchase opportunities in presold issues.
### What is the advantage for an institutional investor in buying presold bonds?
- [ ] Reducing investment diversity.
- [x] Securing potentially high-demand bonds at favorable terms.
- [ ] Increasing tax liabilities.
- [ ] Withholding public offering details.
> **Explanation:** Institutional investors benefit from securing potentially high-demand bonds at favorable terms, which can be advantageous for their investment portfolios.
Thank you for reviewing our detailed entry on presold issues. We hope you found the provided quizzes helpful for reinforcing your knowledge in finance!
