When an issuer brings a new bond, it usually offers a slightly higher yield than its existing bonds of similar maturity would suggest. This extra yield is the new-issue premium (NIP), also called the new-issue concession.
Why it exists
- Investors must be persuaded to commit a large amount of money on a single day.
- New supply adds to the amount of the issuer's debt in the market.
- Buyers need compensation for the risk that the market moves before settlement.
What affects its size
The premium tends to be small for frequent, well-known issuers in calm markets, and larger for debut issuers, unusual structures, large deals or volatile conditions. Very strong order books allow the bookrunners to tighten pricing during the day, reducing the premium.
How it is estimated
Analysts draw a curve through the issuer's existing bonds, interpolate the fair yield for the new maturity and compare it with the final re-offer yield.
General information only, not investment advice.