Intro to Investment Banking and M&A

Question 1

What does underwriting mean for an investment bank? Why is there risk?

Answer 1

Investment banks raise capital for their clients (corporations/governments) from investor capital. They also research and assess the risk of debt issuances, etc.

The risk results from guaranteeing new stock or bond issuances. Investment banks guarantee a certain “price”, and if enough investors aren’t willing to take that price, the investment bank will hold the securities or sell at a discount.