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3. What the difference is between a firm commitment and a best efforts bond issue offering?...

3. What the difference is between a firm commitment and a best efforts bond issue offering? Clearly state your answer to each problem. Answers without justification/explanation will not be given credit

Clearly state your answer to each problem. Answers without justification/explanation will not be given credit

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Answer #1

A firm commitment is basically underwriting the bond offering i.e. guaranteeing the sale of the offering. If the offering is not bought by the market participants entirely, the investment bank would themselves buy the remaining bonds.

Best efforts bond issue is different in that it does not include a guarantee. It is on the basis of the trust between the investment bank and the firm that the bank will try its level best to sell the bonds.

Another difference between the two can be that an unbderwritten offering will be more favoured by the market participants as compared to the best efforts offering because the bank itself is willing to take risks.

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