Case 016Capital markets and financingCore
A power utility wants to issue a 10-year bond. Set the initial price talk and the final coupon from its existing bond, and say what happens if government yields rise during the bookbuild.
1The situation
Jyotika Power Grid, a regulated transmission company, plans to raise Rs 2,000 crore with a new 10-year bond. The 10-year government bond yields 6.90%. Jyotika's outstanding bond maturing in 2033, about seven years away, trades at a spread of 85 basis points over the matching government yield.
The syndicate desk estimates that extending from seven to ten years is worth about 10 basis points of extra spread, and that new issues from similar borrowers have needed a concession of 5 to 10 basis points over their existing bonds to attract buyers.
2Your task
Where do you set initial price talk, where does the bond price if the book is three times covered, and what changes if the government yield rises 15 basis points while the book is open?
Quick check
Where is fair value for the new 10-year bond, before any concession?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Talk the bond at about 7.95%, 105 basis points over, and price it at 7.90% once the book is three times covered. Fair value is Jyotika's existing 85 bps plus 10 bps for the longer maturity, 95 bps. Talk includes the full 10 bp concession; a strong book lets you tighten to 5. If government yields rise 15 bps, the spread holds and the coupon becomes 8.05%, costing about Rs 3 crore a year.
Step 1Where do you start pricing a new bond?
From the issuer's own bonds already trading, because they show what investors charge for this credit today. A new bond is priced off the issuer's existing curve, plus the extra for a longer maturity, plus a small new issue concessionThe extra yield a new bond offers over the issuer existing bonds so investors will switch into it and fill a large order book. to get investors to switch. It is how a shop prices a new size of an existing product: start from what the current size sells for, add for the extra quantity, and open a little cheap so customers try it.
Here: the 2033 bond trades at 85 bps. Three more years of maturity is worth about 10 bps, so fair value for ten years is 95 bps, a yield of 7.85%. A concession of 5 to 10 bps puts the clearing level between 100 and 105 bps.
Step 2Why open at the wide end, and where does it close?
Talk wide so the order book builds, then tighten as demand shows. Initial price talk at about 105 bps, 7.95%, gives the full concession; with orders three times the size, the syndicate can tighten to 100 bps and price at 7.90%. Each basis point on Rs 2,000 crore is Rs 0.2 crore a year, so the 5 bp tightening saves Jyotika Rs 1 crore a year for ten years. Tightening further risks investors dropping out and the bond trading badly on day one, which the issuer pays for at its next deal.
| Step | Spread, bps | Yield |
|---|---|---|
| Government 10-year | 6.90% | |
| Existing 2033 bond spread | 85 | 7.75% |
| Plus curve extension to ten years | 95 | 7.85% |
| Initial price talk, full concession | 105 | 7.95% |
| Final, book 3x covered | 100 | 7.90% |
| Final if government yield rises 15 bps | 100 | 8.05% |
Step 3What happens if government yields jump while the book is open?
The spread is the part the issuer negotiates; the government yield is the market's. If the benchmark rises 15 bps and the spread holds at 100, the coupon rises to 8.05%, about Rs 3 crore a year more, roughly Rs 20 crore over the life of the bond in today's money. The issuer then has three choices: price anyway because it needs the money and the move may persist, cut the size to what it needs now, or pull the deal and wait. Investors who bid a fixed yield may also withdraw or reprice, so the book can shrink even as the yield rises.
Say what decides it: whether the rise is a general move in rates, which waiting will not fix, or a one-day reaction to news, which might reverse. A regulated utility with steady cash needs is often better off issuing in a stable window than chasing the last 15 bps. Bidding conventions differ by market, for instance where domestic issues are bid on an electronic platform, so confirm how the book is run before setting talk.
Where candidates lose it
Candidates add the 85 bp spread to the 10-year government yield and stop, missing that the existing bond is a seven-year bond. That underprices the new issue by the curve extension and the concession, 15 bps, and the book does not fill.
The second miss is treating a three times covered book as a reason to tighten without limit. Over-tightening makes the bond trade below issue and costs the issuer goodwill at its next deal.
What the interviewer asks next
- Jyotika has no bonds outstanding. How would you set fair value?
- Why might a concession be larger in a busy week of supply?
- Would you advise fixing the rate in advance with a forward-starting swap, and what does it cost if rates fall?
Asked at TD Securities, Debt Capital Markets, Toronto, 2026 (Wall Street Oasis): spent most of the time talking about interest rates and bond issuance windows
Company names and figures are illustrative.