3 Spartans Investment House is an underwriting firm speciali

3. Spartans Investment House is an underwriting firm specializing in initial public offerings (IPOs). Spartans is hired to underwrite an issue of 7.5 million shares of stock for MyFace, a private social media firm looking to go public.

Solution

Answer-c:

In the firm commitment method of underwriting, underwriter purchase the securities from the company at a negotiated price and sell them to the investing public at what it hopes will be a higher price. Difference between the price at which securities are purchased from issuer and the price at which sold to the public is called spread. It is the compensation for underwriter.

So, in Firm commitment, underwriter bears the price risk.

In the Best efforts method of underwriting, underwriter acts as an agent of the company issuing the security and receive a fee based on the number of securities sold.

So, in best efforts, firm issuing the securities bears the price risk.