Pls do not handwritten for easy reading
Question:-
Discuss and analyze why corporation do not use the auction methods to issue bonds? List out the pros and cons
Generally the basic reasons why corporation dont use auction method to issue bond is a bit of uncertainty relating to pricing and discount rate attached with auction. In auction we don't know where the pricing or discount rate will land up ending. We know that those investors who are willing to invest in bonds prefer bonds over stock because of certainty and stability which lacks in stock and if that certainty features itself get removed by auction method then it will be better for investors to rather look to invest their money in bonds. Thus, it will be better for corporations not to use auction method.
Pros of using auction method
1 . Possibility of higher issue price = It is possible that the general public who is participating in auction is not that much informed as are investment bankers. This, as a result it may be possible they may end up paying a higher amount for the bonds.
2. Saving of cost = If corporations do not use the auction method, then they will use investment bankers like Goldman Sachs and Morgan Stanley in order to sell their bond and those investment banks charges a hefty amount as commission for their services .This, if we choose auction method then it will lead to cost savings in terms of commission to investment bankers.
3 . Direct dealing with the public = It gives opportunity to the corporation do directly deal with the general public rather than dealing through a middleman.
Cons of auction method :-
1. Uncertainty = the biggest disadvantage of auction method is the uncertainty of pricing and discounting that it brings with itself.
2 . Lack of professionalism audience = the person's to whom we are dealing do not necessarily includes professional of financial world and it sometimes takes a lot of efforts by the corporations to explain to these people about the features of bond issue and related terms and conditions
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