ollapodrida wrote:In firm commitment underwriting, a group of investment banking firms known as a syndicate agree to sell bonds on behalf of the issuer. The issuer sells the bonds to the syndicate at a fixed price, and the syndicate members take on the responsibility of selling all the bonds. The cost of any unsold bonds will be distributed equally amongst the syndicate members. A group of G investment banking firms agreed to sell equal amounts of a bond issue for the state of Transylvania with each expecting to make a 10% profit from the sale of their portion. The state of Transylvania sold the entire issue to the syndicate for $x million. If each of S syndicate members was unable to sell $5 million worth of bonds, which of the following expressions represents the final profit/loss ($million) that each of the S syndicate members will realize as a result of the syndicate's inability to sell the entire bond issue?
(A) 5/G
(B) x/G - 5
(C)(0.1x - 5S)/G
(D)(0.1(x-5G)-5s)/G
(E)(x-5G)/10G
Dear
ollapodrida,
I'm happy to respond.
I like the subject of this question, because it seems so realistic to the business world. The text, I believe, is much longer than any word problem that would appear on the GMAT, so in that sense, it's not quite GMAT-like. Furthermore, there are a couple problems.
First, there's an ambiguity. It says:
each of S syndicate members was unable to sell $5 million worth of bonds
Is that $5 million of the original purchase price or of the 10% markup price? The former seems like a more certain interpretation, but the GMAT wouldn't leave something like that unclear.
Also, the relationship of G and S is a little unclear. The syndicate is a group of investment banking firms, so each individual bank is a syndicate member. Is S < G a subset of G? In other words of all G members in the syndicate who bought these bonds, S were not able to sell some, but the other (G - S) were able to sell everything they had bought? Again, this seems like what the paragraph means, but it is not crystal clear.
Finally, x is in millions of dollars, which implies the answer should be in millions, but that is not explicitly specified. Again, I will assume this.
I will go through this assuming what I said above I thought were the most obvious assumptions. The whole issue costs $x million.
Total paid for purchase of issue = x
G banks split this purchase, so each paid
Paid by each bank = x/G
Some of the banks apparently sold everything they bought: they are outside the question. We are looking at some subset S who were not able to sell everything. Notice, we want to know the profit/loss of
each one of those banks, so it doesn't matter at all how many of them are in this situation. The number S is absolutely irrelevant to this calculation and should not appear at all in the correct answer choice. Right there, we could eliminate a few answers.
Let's think about an individual bank that couldn't sell everything.
amount paid = x/G
amount paid for sold portion = x/G - 5
amount received for sold portion = 1.1*(x/G - 5)
profit on sold portion = 0.1*(x/G - 5) = 0.1*(x/G) - 0.5
loss on unsold portion = 5
net gain = profit - loss = 0.1*(x/G) - 0.5 - 5 = 0.1*(x/G) - 5.5
The final problem is: the answer I get is not listed among the answer choices.
Where did you get this question?
Mike
