Negotiated vs. Competitive Offerings
With all the major bond types and their features covered, the final piece is understanding how bonds are actually brought to market. The method of sale varies by issuer type.
Two Methods of Sale
Bonds reach investors through either a negotiated process or a competitive bidding process. The method depends largely on the type of issuer.
Think of it this way: Negotiated offerings are like hiring a contractor you trust to build your house and working out the price together. Competitive offerings are like putting the job out for bids and picking the cheapest qualified contractor. Government issuers (using taxpayer money) usually must take bids; private issuers can pick their partner.
Negotiated Offering
- The issuer selects an underwriter and negotiates the terms directly
- Terms negotiated include the spread, price, timing, and structure
- The underwriter provides advisory services and performs due diligence
- Most common method for:
- Corporate bonds
- Many revenue bonds
Advantages: Flexibility in timing, advisory support, ability to structure the deal for market conditions
Exam Tip: Gotchas
Negotiated offerings are typical for corporate bonds and revenue bonds. The issuer picks the underwriter and works out terms directly; there is no competitive bidding step.
Competitive Offering
- The issuer solicits sealed bids from multiple underwriting syndicates
- The award goes to the syndicate offering the lowest net interest cost (NIC) to the issuer
- The issuer gets the best possible price through competition
- Most common method for:
- General obligation (GO) municipal bonds
- Often required by law for government issuers to ensure taxpayer protection
Advantages: Competitive pricing ensures the lowest borrowing cost for the issuer
Exam Tip: Gotchas
Competitive bids award to the lowest net interest cost (NIC), not the highest price. This method is typical for GO municipal bonds because government issuers are often required by law to protect taxpayers.
Treasury Auctions
U.S. Treasury securities use a unique auction process:
| Bid Type | Who Uses It | How It Works |
|---|---|---|
| Competitive bids | Institutional investors | Bidder specifies the yield they'll accept; may or may not receive securities |
| Non-competitive bids | Retail investors | Bidder accepts whatever yield is determined; guaranteed to receive securities |
- Non-competitive bids are limited to $10 million per auction
- Competitive bidders may be partially filled or shut out if their yield is too high
Exam Tip: Gotchas
Non-competitive Treasury bidders accept whatever yield the auction determines and are guaranteed securities (up to $10 million). Competitive bidders specify the yield they want and may be shut out if their yield is too high.
Which Method for Which Bonds?
| Bond Type | Typical Method of Sale |
|---|---|
| Corporate bonds | Negotiated |
| Revenue bonds | Negotiated |
| General obligation (GO) municipal bonds | Competitive bidding |
| Treasury securities | Auction (competitive + non-competitive) |
Exam Tip: Gotchas
- GO bonds = competitive bidding; revenue bonds and corporate bonds = negotiated. The exam frequently tests which method goes with which bond type.
- Competitive bidding awards to the LOWEST net interest cost (best deal for the issuer, protecting taxpayers).
- Non-competitive Treasury bidders are GUARANTEED to receive securities. Competitive Treasury bidders specify their yield and may be shut out.