SIE Knowledge of Capital Markets Question 30: Answer and Explanation

Question: 30

Which of the following types of underwriting agreements requires the lead underwriter to take responsibility for a certain number of securities in the issue?

• A. Mini-maxi
• B. All or none
• C. Part or none
• D. Firm commitment

Correct Answer: D

Explanation:

D: Choice D is correct because in a firm commitment undertaking, the lead underwriter takes responsibility for all securities in the issue, by buying all shares in the issue, and then re-sells them at a profit to earn compensation. Choices A, B, and C are incorrect because they each specify a sales target, but, while the targets provide incentive, the lead underwriter is not obligated to reach a target.