21-78 An investment bank may take a big loss when underwriting an issue on a firm commitment basis because

Question

Quizplus · Accepted Answer

An investment bank may overestimate the demand for the shares by the market, resulting in a big loss when underwriting an issue on a firm commitment basis. This is because the investment bank commits to buy the entire issue from the company at a certain price regardless of whether they can sell all the shares to the public. If the public demand for the shares is lower than anticipated, the investment bank may be left with unsold shares and take a loss. However, rising security prices could actually benefit the investment bank by allowing them to sell the shares at a higher price. Therefore, answer choices B, C, D, and E are incorrect.

21-78 an Investment Bank May Take a Big Loss When