3.3.3.2.1 Underwriting Compensation
For both competitive bid and negotiated sales, underwriters are compensated by the difference between the price they pay the issuer for the bonds and the price at which they resell them to the public. This difference is called the spread, which is made up of several components. The managing underwriter gets a percentage of the entire issue, each of the syndicate members gets a percentage of the sales they make, and if a selling group is participating, they get a cut as well.
We will describe the components of the spread in terms of bond points. A point is equivalent to 1% of the face value of a bond. For a bond having a face value of $1,000, one point is worth $10. Let’s assume a face value of $1,000 for this example and an underwriters’ spread of 1 point. That means that for every $1,000 bond sold, the underwriters as a group will receive $10.
The manager’s fee is the payment to the lead underwriter for services rendered. This fee, which might be in the neighborhood of 1/8 point, comes off the top before any other profits are allocated among the membership. The remainder of the spread is called the total takedown fee. In our example, the syndicate member would receive 7/8 of a poi