An Analysis of the Relationship between Underwriter Spread and the Pricing of Municipal Bonds

Abstract

Virtually all new state and local governmental bond issues are purchased initially by an underwriter, or syndicate of underwriters, who in turn resells the bonds to investors. The underwriter attempts to sell the bonds for an amount which exceeds his purchase price. The difference is underwriter spread. Of course the probability that the underwriter will actually receive the planned spread is directly related to the yields at which the reoffering is attempted. The purpose of this study is to test and analyze the relationship between reoffering yields for new municipal bond issues and the spread which the underwriter plans to receive. This study differs from previous studies in method of analysis, and in being the first such study to examine underwriter behavior in the bond market.