Question

Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?

1) Initial public offering

2) Best efforts underwriting

3) Firm commitment underwriting

4) Rights offer

5) Private placement

Answer 1

Ans: 3) Firm Commitment Underwriting

Usually, Underwriter is the one who gets into deal with the issuer in Initial Public Offerings.He negotiates with issuer for a perticular purchase price and sells to the public at the offering price.In a firm commitment underwriting,the underwriter takes all the risk i.e the obligation of any unsold inventory or securities. The advantage to the underwriter in these types of deals is the difference between offering price and purchase price