DEFINITION of 'Price Talk'

Price talk is the discussion of the appropriate price for an upcoming security issue. The investment community will determine a reasonable range of prices within which the new security should be sold.

BREAKING DOWN 'Price Talk'

Price talk occurs when dealers, investors, and brokers analyze and debate the price of a new security. Comparisons are made to benchmarks, such as past issues by the same entity or similar securities. Some investment banks, such as JPMorgan, provide their customers with price talk prior to the auctions of securities, allowing the clients insight into the new issue.

Price talk can be observed in the Dutch auction where the prices and interest rates of securities are set after taking in all bids and determining the highest price (or lowest yield) at which the total offering can be sold. Prior to the auction, brokers discuss the range of possible yields or spreads with their clients. This discussion is referred to as price talk, and it gives clients and prospective investors a basis for probable rates, though investors are free to submit bids outside of this range. Price talk provides an indication of the yield or spread that the issuing entity and the underwriters expect to bring the new financing. When price talk is given in yield, it provides some reference as to what the coupon rate on a bond will be. Price talk on spreads is more often done with investment grade securities.

Investors enter a competitive bidding process by submitting bids which specify the number of shares they are willing to purchase and the lowest yield they would be willing to accept from the bond. The yields submitted fall within the range of yields discussed by underwriters. Bids are accepted until the deadline after which the auction agent calculates the clearing rate based on the submitted bids. The clearing rate is the interest rate that will be paid on the securities until the next auction. If the investor’s bid rate is less than the clearing rate, the investor will receive all or at least part of his or her desired bid. Bids placed above the clearing rate will not be filled.

The range of prices discussed for a new issue is not readily available from third parties. Discussions about the appropriate price for a new security typically precedes the initial public offering (IPO) of a company's stock or upcoming bond issue. Early price talk occurs just as the new issue is announced, and the official price talk occurs closer to when the security will be priced.

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