SIE practice questionmediumFirm Commitment Underwriting
In a firm commitment underwriting, the underwriter:
- AGuarantees the issuer a minimum stock price for 90 days after the offering
- BPurchases the entire issue from the issuer and assumes the risk of reselling to investors✓ Correct answer
- COnly agrees to use its best efforts to sell the securities
- DActs as an agent and sells as many shares as possible, returning unsold shares to the issuer
Explanation
Why B — Purchases the entire issue from the issuer and assumes the risk of reselling to investors
In a firm commitment underwriting, the underwriter buys the entire issue from the issuer and assumes the risk of reselling it. In a best efforts underwriting, the underwriter acts as agent and has no obligation to purchase unsold shares.
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