Abstract: This chapter discusses the various components of costs incurred in the flotation of new issues and the process by which an underwriter arrives at the estimation of the underwriter compensation under a firm commitment contract. The chapter describes a four-step process that includes estimating the expected market price of the new issue; setting the offer price; determining the expected underwriting costs; and setting the bid price. The chapter examines the various factors that contribute to the cost of providing the various underwriting services and explains how the underwriting risk can be priced as an insurance service or within a contingent claims framework. The chapter also explores various relationships and tradeoffs the underwriter faces in regards to the components of underwriting costs and in determining the underwriter compensation or gross spread.
Publication Year: 2017
Publication Date: 2017-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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