Public offerings of municipal bonds, offered through an investment-banking firm, can be underwritten by the investment banker on a firm commitment basis or on a best effort basis. Explain the basic difference between these two underwriting methods.
The firm commitment basis is when the investment banker purchases the full offering and assumes a risk in hopes of selling the offering at a profit. (This guarantees the municipality the funds for the bond issue)
- The best effort underwriting does not guarantee a firm price to the municipality, and the investment banker incurs no risk and only gets a fee for the sale.