Capital MarketsQuestion 304 of 398
In a firm-commitment underwriting, what role does the investment bank (underwriter) take on?
a.It acts only as an agent and returns unsold shares to the issuer
b.It buys the entire issue from the issuer and assumes the risk of reselling the shares
c.It guarantees investors a fixed return on the securities
d.It insures the issuer against a decline in the stock's market price
Explanation
In a firm-commitment underwriting, the underwriter purchases the whole issue from the issuer and bears the financial risk of reselling it to the public. If shares go unsold, the underwriter is left holding them, unlike a best-efforts arrangement where unsold shares return to the issuer.
Practice all 398 questions free — no signup required.
Related questions on this topic
- What is the primary purpose of the Securities Act of 1933?
- Which federal law created the Securities and Exchange Commission (SEC) and gave it authority over the secondary market?
- A company is selling its shares to the public for the very first time. This event is best described as a(n):
- Under a best-efforts underwriting, what happens to shares that the syndicate cannot sell?
- Several broker-dealers join together to share the risk and distribution responsibilities of a large securities offering. This group is called a(n):
- What is a tombstone advertisement?
Last reviewed: · editorial process
PrepPass Editorial Team · Verified against FINRA Securities Industry Essentials (SIE) Exam · How we review