US CMA Part 2 · Chapter 4 · Question 8 of 15
In a firm commitment underwriting of an initial public offering, which party bears the risk that the shares cannot be sold at the offering price?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) The investment banker (underwriter), which buys the entire issue from the company
Explanation
In a firm commitment underwriting the investment bank buys the whole issue at an agreed price and resells it to the public, so it bears the risk of unsold shares or a fall in price. In a best-efforts arrangement the issuer bears that risk. The SEC reviews disclosure but does not guarantee the success of an offering.
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