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 investment bank (underwriter) purchases the entire issue from the issuer at a discount (the spread) and resells it to the public at the offering price. The underwriter bears the risk of unsold shares. This is the most common type of underwriting for established companies. Choice A/C describes a best efforts underwriting, where the underwriter acts as agent and has no obligation to purchase unsold shares.
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