Question

With firm commitment underwriting, the issuing firm is sure of the total amount of funds it will receive at the time of offering because the underwriting firm buys the entire issue and assumes full financial responsibility. And explain the reason.
a. True
b. False

Answer 1

The statement is TRUE.

In a firm commitment underwriting, the underwriter assumes full financial responsibility and buys all the securities that the issuers has put for sale. The more the issuer's securities are in demand among the investors , the more likely the underwriting will be done on the basis of a firm commitment. In a firm commitment, the issuer is guaranteed the total amount of funds that he will receive, and the underwriter puts his money at risk. The underwriter may not purcahse all the securities if the quality of the security is poor but cannot refuse purchasing securities if the market is poor.

The correct option is option a.