Anthony Schmidt, CFA, makes the following statements while discussing issuance of new debt:
Statement 1:
A best-efforts offering, which is a form of a negotiated offering, occurs when an investment banker purchases an entire issue to resell.
Statement 2:
Registration with the SEC can be avoided with a private placement, but a higher yield will be required to compensate for the limited liquidity.
Are Schmidt’s statements accurate? A. Only one of these statements is accurate. B. Both of these statements are accurate. C. Neither of these statements is accurate.
Statement 1 is incorrect. A firm commitment (not a best-efforts offering) is an arrangement where the investment banker purchases the entire issue and resells it.
Statement 2 is accurate. Under a private placement, a firm can avoid registration with the SEC, but the buyer will require a higher yield to compensate for the illiquidity of the issue.
