SIE (Securities Industry Essentials) Practice Exam

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A particular issuer of bonds chooses to engage a managing underwriter under a negotiated, firm-commitment underwriting contract. The underwriter chooses to sell the bonds using a selling group rather than a syndicate. Who bears the financial risk of unsold bonds?

The selling group
The syndicate members
The bondholders
The managing underwriter

The correct answer is: The managing underwriter

The managing underwriter bears the financial risk of unsold bonds. This is because in a negotiated, firm-commitment underwriting contract, the underwriter assumes full responsibility for purchasing and reselling the bonds at a predetermined price. The underwriter may choose to sell the bonds using a selling group, but this does not shift the financial risk to the selling group. The syndicate members and bondholders are not directly involved in the underwriting process and therefore do not bear the financial risk.