Bond underwriting is the process by which large investment banks or financial institutions assess the credit worthiness of a borrower in order to provide them with access to the capital markets. If these financial institutions believe the borrower to be credit worthy, they will assume responsibility of issuing and distributing a new bond security to the investor community for a fee known as the underwriting spread. The underwriting spread is the difference between the price the banks pay for the security from the borrower and the price that they sell the bond security for on the open market.
A lucrative source of income for many investment banks is through the purchase of bond securities through the treasury auctions as they act as a distribution channel and underwriter as well. Fannie Mae's weekly benchmark bills auctions and discount note window offer even more profitable underwriting opportunities for dealers to get their hands on securities at a discount to the market.