Question

Which of the following is a role the investment bank takes on during the bond issuance process? Choosing the bond's par value. Pricing the bond. Telling the firm whether it should issue stocks or bonds to raise capital. None of the above Question 4 (5.5 points) TRACE did not reduce bond trading costs as much as expected by regulators. True False

Answer 1

The Investment banker helps the Bond issuing company in analyzing the market and suggest the best price suitable for the bond. The par value of the bond is based on the Memorandum and Article of Association of the company and not suggested by the Investment banker. The company may take the help of Investment banker in deciding the mode of raining capital --by stock issue or by bond issue , but that is the preliminary step. After the company decides for going ahead with bond issue , then the Investment Banker helps in deciding the bond issue price.

So , the second option "Pricing the Bond " is the correct option.

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Ans 4.

The introduction of TRACE actually reduced the trading cost of bonds to a considerable extent.

Customers are now more informed about the bond pricing and transactions as against the previous opaque market conditions , the information advantage of the dealers in the opaque market is gone, the dealers cannot charge extra rent or cannot mislead the customers on pricing post TRACE. The improved information flow also enables the dealers to reduce inventory . Th informed customer has more competitiveness and bargaining power in the market now and all these factors have led to the cost savings in bond trading.

So the statement that "TRACE did not reduce the bond trading cost as much as expected by regulators" is not FALSE.