When an investment banker acts in the function of an "underwriter," she
A)gives a "firm commitment" to purchase the securities from the corporation at a set price.
B)guarantees that the company will not suffer a decline in earnings after taxes.
C)may sell as many securities as possible and return the rest unsold.
D)may give advice to management.

Question

Quizplus · Accepted Answer

When an investment banker acts as an underwriter, they commit to purchasing the securities from the corporation at a set price. This is known as a "firm commitment underwriting." Option B is incorrect as an investment banker cannot guarantee a company's future earnings. Option C is incorrect as it refers to a "best efforts underwriting" where the banker tries to sell as many securities as possible but does not commit to purchasing any unsold securities. Option D is also incorrect as providing management advice is a different role for an investment banker.

When an Investment Banker Acts in the Function of an "Underwriter