Confused on how banks and issuers benefit from underwriting spread
I'm having trouble understanding underwriting spread and how both issuers and investors end up happy with the terms. Ex. bonds purchased by the IBank at a discount and reoffered at par. Bank bought $1,000,000 bonds at 99% of price ($990,000), and sells to the market at a price of 100%, netting a 1% total spread. In this case, if the bank is selling to investors at par, investors expect a coupon equal to the mkt yield. But if the issuers had to issue at a discount, they wouldn't be happy paying the mkt yield, they would want to pay a coupon under the mkt yield. This wouldn't work. What am I misunderstanding?
They are not necessarily offered at par by banks. Banks price a few points above discount. E.g. issuer discount is 300bps (proceeds to issuer are 97 for each piece of paper), banks can sell to investors in the 97-100 range without losing money.
But isnt the issue still the same? Lets say issuer sells at discount of 97. Banks sell to investors at 99, making a 2% spread. Investors would expect coupon slightly under the market yield, but the issuers that issued at 97 would only want to pay an even lower yield due to the steeper discount. Or does the issuer simply accept the coupon they must pay based on IBank’s re-offering price of 99.
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