A bond is a certificate that a bond issuer issues to a bond purchaser as a promise to repay a debt with interest. A bond underwriter is a middleman who buys these securities at a discount from the bond issuer and then resells them to potential investors. Profits are thus determined the difference between the bond’s initial purchase price and its resale price. The underwriting spread is the term for this margin. In general, the bond underwriter’s job is to manage the spread, ensuring that he or she makes decisions that benefit both himself and the bond issuer.
Bond underwriting may entail the purchase of public bonds such as municipal and treasury bonds issued the government, as well as corporate bonds. Although bond issuers have the option of selling directly to a bond underwriter, this is not the most common route. Rather, bonds are usually purchased through a bidding process or through negotiations with third parties. In a process known as syndication, underwriters — even underwriters from different organizations — work together to obtain bonds.
Bond issuers frequently vet underwriters before agreeing to a sale. Interviews and resumes highlighting key underwriting experience may be requested. Financial planning and time commitment documentation may also be required for an underwriting transaction. Every new bond purchase could be viewed as a new job interview.
The success rate of an underwriter is highly unpredictable. The bond underwriter, for example, must get a good deal from the issuer, and this step frequently relies on familiarity and research. However, market factors beyond the underwriter’s control, such as interest rate fluctuations, can often stymie profits. If an underwriter is unable to find enough investors, he or she will be stuck with the investment.
Bond underwriters can work with either private individuals or businesses as clients when selling bonds. When dealing with larger groups, the underwriter must be wary of political influences, as underwriters have been accused of peddling to special interests in the past. In any case, a bond underwriter will check to see if the client has the financial means to purchase from the capital markets. As the most important aspect of this process, credit history will be considered. Underwriting, whether it’s bond underwriting or insurance underwriting, is based on determining whether a consumer is eligible for a product.
Certain factors will help you become a better bond underwriter. A college degree is essential, especially one with a strong financial and business foundation. Analytical skills and a working knowledge of spreadsheets and other tracking programs are also essential. Solid judgment and a risk-taking, sales-driven mindset could help you succeed even more. In some areas, certification may be required.
Bond underwriters can work for themselves or for a larger company such as an investment bank once they have completed their education requirements. An employee of a large corporation may have a better chance of obtaining more prestigious clients, such as major corporations and organizations. In fact, underwriting accounts for a large portion of a securities firm’s or investment bank’s profit margin.