Question

a) Discuss the process of going public through an IPO. Your answer should also include the Part played by the underwriter in the issuance of the IPO.

b) With respect to fixed income securities, discuss the concept of:

I. Treasury Bills

II. Municipal Bonds

Answer 1

Answer to Question (a)

The commencement of the IPO process is by contacting an investment bank where it is needed to take significant decisions regarding setting the issue price of the shares in the market. Investment bank takes the responsibility of underwriting, where the task of the underwriters to sell shares to the public.

There are some of significant requirements which must be met by the company issuing IPO as laid down by the underwriter such as:

• The company must earn revenue on a consistent manner and the management system of the company must be able to predict the earnings of the company on a quarterly or monthly interval.
• The working capital or cash must be efficient for the company to generate the IPO process. The business must show potential growth to issue IPO to the public.
• The management team must be effective where the financial statements of the company must be evaluated by using various tools and techniques such as the ratio analysis and many more.
• Based on the long term business the organization must have a strong vision to accomplish the task which are associated with it and the leverage in terms of performance of the must be high.

Answer to Question (b)

• Treasury Bills - Treasury bill is considered as the short term fixed income securities which actually matures within a year and doesn't requires to pay interest out of it. Investors on the other hand can purchase T-Bills on a discount which is less than the face value of the bill. After the maturity of the bills, investors of the company are paid based on the full amount which is face value of the bill. In this case the interest earned is merely the difference between the purchase price and face value of the bill.
• Municipal bonds - Municipal bond is also referred to as one of the short term fixed income securities or rather a government bond undertaken to finance the long term projects. This bond is actually a tax exempt from the federal income tax. A portion of the principle amount must be taken into consideration and at the time of sales the municipal bonds are sold at face value.