Question

1.Why is it important that in an underwriting the investment banker does not overvalue (overprice) or undervalue (underprice) the securities? If the securities are overpriced or underpriced, who enjoys the benefit?

Explain into detailes.

Answer 1

It is important that an investment banker should not be undervaluing or over valuing a security in terms of initial public offer because this will have negative interest on either of the parties who will be either be the issue or the subscriber of the initial public offer.

When the underwriting investment banker will undervalue the initial public offer, it will mean that the general subscriber of that initial public offer will gain and those who are seeking an exit like the venture capitalist, and the promoters who wants to sell stake in a company in order to raise cash, will be at loss.

When the underwriting investment banker will overvalue are security during the initial public offer, it will mean that those who are issuing the initial public offer and seeking exit like venture financial capitalist and promoters will be gaining on the the initial public offer, but the general public and the other investment firm who are subscribing to that initial public offer will be at the losing end.