Answer (C) is correct . An investment banker performs an underwriting or insurance function when it purchases an issue of securities and then resells them. The risk of price fluctuations during the distribution period is borne entirely by the investment banker. Investment banking is also an efficient vehicle for marketing the securities because investment bankers are specialists in such activities. The profit earned is the underwriting spread, or the difference between the purchase and resale prices of the securities (effectively, the wholesale and retail prices).
Answer (A) is incorrect because The underwriting spread is not based on a commission. The underwriter actually buys the new securities and resells them at a price that is expected to result in a profit.
Answer (B) is incorrect because The underwriting spread is not a genuine discount; it is simply the difference between the price paid and the price received for a new security.
Answer (D) is incorrect because The underwriting spread is not based on a commission. The underwriter actually buys the new securities and resells them at a price that is expected to result in a profit.
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