Question

1.Why is it important that in an underwriting the investment banker does not overvalue (overprice) or undervalue (underprice) the securities? If the securities are overpriced or underpriced, who suffers the loss?

Explain into detailes.

Answer 1

Suppose value of a issuer company share is $100. And, underwriter values stock at 92 and 105 in two scenarios. Then loss is:

Particulars	Under	Over
Stock price	100	100
Less: valuation	(92)	(105)
Under/ (over) valuation	8	(5)
Loss suffered by	Issuer	Underwriter

If stock is undervalued then underwriter benefits but issuer suffers the loss.

If stock is overvalued then underwriter suffers the loss.