BOND UNDERWRITING

AM | @MackinlayEuruni

Suppose that German chipmaker Infineon (www.infineon.com) needs long-term financing to build a factory near München. Now, the ‘talent’ of the company is mostly made up of engineers and scientists. They may not be aware of all financing options available. And that’s how they approach an investment bank like … Deutsche Bank. Investment banks offer expertise and advice in creating a bond issue, including determining the interest rate and maturity [FEE INCOME!]. In acting as an intermediary between a bond issuer (who demands loanable resources) and a bond buyer (who supplies loanable resources), the investment banker serves as an underwriter for the bonds. What does that mean?

When investment bankers underwrite the bonds, they assume the risk of buying the newly issued bonds from the corporation or government unit; they then resell the bonds to the public or to dealers who sell them to the public. The investment bank earns a profit, based on the difference between its purchase price and the selling price (price concession).

Assets & Liabilties. Step 1. Infineon +€99m cash (assets), +€100m bond (liab.); DB -€99m cash (assets), +€100m bond (assets). Step 2. DB +€100m cash (assets), -€100 m bond (assets); Investors +€100m bonds (assets), -€100m cash (assets).

Maturity. Medium- to long-term.

Type of banking. Investment banking.

Info. See Bloomberg's 1 Half 2012 League.
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