When an investment bank guarantees the sale of an entire issue at a negotiated offering price, this best describes a(n):
A. rights offering.
B. best effort offering.
C. underwritten offering.
Answer (2)
The term that best describes when an investment bank guarantees the sale of an entire issue at a negotiated offering price is an underwritten offering. This involves the bank buying the whole issue and selling it to investors, taking on the financial risk. In contrast, other offerings like rights offerings and best effort offerings do not include such guarantees.
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When an investment bank guarantees the sale of an entire issue at a negotiated offering price, this is best described as an underwritten offering . This is the chosen option: C.
In an underwritten offering, an investment bank plays a crucial role by agreeing to buy the entire issue of securities from the issuer at an agreed-upon price. By doing so, the bank assumes the financial risk of selling those securities to the public. This guarantees that the issuer will receive a specific amount of money regardless of how well the securities sell in the market.
Here's a step-by-step breakdown to understand this process better:
Negotiation and Agreement :
The investment bank and the issuing company negotiate the terms of the offering, including the price and the amount of securities.
Underwriting Agreement :
Once the terms are agreed upon, they enter into an underwriting agreement. This legal contract obligates the investment bank to purchase the entire issue of securities.
Selling to Investors :
The investment bank then sells those securities to investors. The bank takes on the risk that it may not be able to sell all the securities at a profit.
Financial Assurance :
The issuer benefits by having a guaranteed amount of capital raised, regardless of market conditions or investor interest.
The underwritten offering is a common method used in public offerings, such as Initial Public Offerings (IPOs), where the underwriting bank ensures a successful distribution of the securities.
