What it means
When a company or government issues bonds, it normally uses banks as underwriters. The banks agree to buy the whole issue from the issuer at one price, then offer it again to investors at a slightly higher price.
That second price, the one at which the securities are offered a second time, is the reoffer price. The gap between the price the issuer receives and the reoffer price is called the underwriting discount, or spread.
It compensates the banks for the work of marketing the deal and for the risk of being left holding bonds that they cannot sell. In a large bond issue, even a small fraction of a percentage point is worth hundreds of thousands of dollars.
The reoffer price is quoted in the offering documents, often as a percentage of face value, such as 99.50. A bond reoffered below 100 is sold at a discount and has a yield higher than its coupon, which is the fixed interest rate it pays.
A bond reoffered at 100 is sold at par, and its yield equals its coupon. For the issuer's finance team, the reoffer price matters because it sets the yield investors will accept, and therefore the true cost of borrowing.
It also determines how much cash the issuer actually receives, after the underwriters' spread. Comparing offers from different banks means comparing the net proceeds as well as the stated interest rate.
The price is set by negotiation just before the bonds are sold, based on market conditions and investor demand. If demand is strong, the underwriters may tighten the pricing, which helps the issuer, and if the market is weak, they may need to raise the yield to attract buyers.
Once the bonds are released, they trade freely and their price may move away from the reoffer price.
In practice
Real-world examples.
Example
A utility company issues $250,000,000 of ten-year bonds through a group of banks. The offering memorandum states a reoffer price of 99.75, so investors pay slightly below face value. The treasurer calculates her net proceeds after the underwriting spread and updates the funding plan.
Example
A city government sells bonds to fund a new hospital. Underwriters buy the issue at 98.80 and reoffer it to investors at 99.50, earning a spread of 0.70 points. The city's finance officer compares this with competing bids from other banks.
Example
A fund manager reviews a new bond issue and sees a reoffer price of 100 with a coupon of 5%. She knows that the bond is being sold at par, so its yield to investors equals 5%. She decides whether this yield is high enough for the risk compared with similar bonds.
Formula
Calculation
Underwriting spread = Reoffer price - Price paid to issuer
Issuer proceeds = Face value x Price paid to issuer (as a percentage)
Suppose a company issues $100,000,000 of bonds. The underwriters reoffer them to investors at 99.50, so investors pay 100,000,000 x 0.9950 = $99,500,000. The underwriters pay the issuer 99.00, so the issuer receives 100,000,000 x 0.9900 = $99,000,000. The spread is 99.50 - 99.00 = 0.50 points, which is $500,000 of compensation for the underwriters.Case study
Seen in the real world.
Redstone Logistics is an illustrative, fictional company planning a $60,000,000 bond issue. Two banks submitted competing proposals, and both quoted the same 5.5% coupon.
Bank A proposed a reoffer price of 99.25 with a payment to the issuer of 98.75, while Bank B proposed a reoffer of 99.50 and a payment of 99.00. The finance director calculated the net proceeds for each: $59,250,000 for Bank A and $59,400,000 for Bank B.
She chose Bank B, which gave Redstone an extra $150,000 despite the identical coupon. The illustrative lesson was that borrowers should compare the full price terms and not only the headline interest rate.
Watch out
Common mistakes.
- Confusing the reoffer price with the price the issuer receives, when the issuer's price is lower by the underwriting spread.
- Comparing offers only by coupon rate, ignoring the price at which the bonds are sold and the proceeds.
- Assuming the bond's market price will stay at the reoffer price, when it moves with interest rates and credit conditions once trading begins.
Questions
People also ask.
Who sets the reoffer price?
The underwriters set it with the issuer, usually shortly before the bonds are sold, based on market conditions and investor demand.
How does the reoffer price affect yield?
The lower the reoffer price compared with face value, the higher the yield investors earn, because they pay less for the same stream of payments.
Is the reoffer price the same as the issue price?
In many bond offerings the two are used interchangeably to mean the price at which the bonds are first offered to the public.
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