Question

In a firm commitment procedure, the majority of risk of the issue is borne by

A.
Designated Market Maker

B.
Issuing Firm

C.
Underwriter Syndicate

D.
Credit rating agencies

Answer 1

A firm commitment procedure is one in which underwriter takes the fule responsibiility and risk of the stock issue. In case, if stock is under subscribed i.e. received less applications than initially offered, then underwriter has to purchase the remaining shares at the IPO price.

(A) Designated Market Maker: Market maker is one who buys and sell securities and wants to earn a profit through a bid- ask spread. He is not responsible for risk of issue. His works starts after issue is done to create secondary market for security.

(B) Issuing Firm: In firm commitment, issuing firm don't take any risk and it transfer its entire risk to underwriter for a small fee paid to him.

(C) Underwriter Syndicate: In Firm Commitment this party is entirely responsible for the risk related to issue of securities. They receive a small commission as a % of total money raised from issuing firm for taking that risk.

(D) Credit rating agencies: These only provide the information related to credit worthiness of company. They are just passing information. They don't assume any risk.

Thus, Option (C) is correct.