1. In what four ways can investment banking firms generate income?

- Investment banking firms generate revenue from commissions, fee income, spread income
and principal activities. Specifically; Public offering (underwriting) of securities, Trading
securities, Private placement of securities, etc.
2. In what three ways may an investment banking firm be involved in the issuance of a new
security?
a. Advising the issuer on the terms and the timing of the offering
b. Buying the securities from the issuer
c. Distributing the issue to the public
3. What is meant by the underwriting function?
- Underwriting function is the buying of securities from the issuer. When an investment
banking firm buys the securities from the issuer, and accepts the risk of selling the securities
to investors at a lower price, it is referred to as an underwriter.
4. What is the difference between a firm-commitment underwriting arrangement and a best-
efforts arrangement?
- When the investment banking firm agrees to buy the securities from the issuer at a set
price, the underwriting arrangement is referred to as a firm commitment. In contrast, in a
best-efforts underwriting arrangement, the investment banking firm agrees only to use its
expertise to sell the securities; it does not but the entire issue from the issuer.
5. Explain at least three circumstances in which investment banking firms must commit their own
capital
6. In typical underwriting, why is it necessary to form an underwriting syndicate and selling
syndicate?
- In an underwriting, it is necessary to form an underwriting syndicate to share the risk of
capital loss which would expose it to the danger of losing a significant portion of its capital.
And a selling syndicate is necessary when an investment banking firms attempts to sell the
securities to their investor client base, and to increase the potential investor base.
7. a. What is meant by underwriting spread?
- underwriting spread is the fee earned from underwriting a security , the difference between
the price paid to the issuer and the price at which the investment bank then offers the security
to the public.
b. How is the underwriting spread distributed between the lead manager, the members of the
underwriting syndicate, and members of the selling syndicate?
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8. What is meant by riskless arbitrage?