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PART SIX Cost of Capital and Long-Term Financial Policy syndicate

A group of underwriters formed to share the risk and to help sell an issue.

gross spread

Compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price.

firm commitment underwriting

The type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.

Learn more about investment banks at Merrill Lynch ■ (www.ml.com).

best efforts underwriting

The type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility.

Typically, the underwriter buys the securities for less than the offering price and accepts the risk of not being able to sell them. Because underwriting involves risk, underwriters usually combine to form an underwriting group called a syndicate to share the risk and to help sell the issue.

In a syndicate, one or more managers arrange, or co-manage, the offering. The lead manager typically has the responsibility of dealing with the issuer and pricing the securities. The other underwriters in the syndicate serve primarily to distribute the issue and produce research reports later on.

The difference between the underwriter's buying price and the offering price is called the gross spread, or discount. It is the basic compensation received by the underwriter. Sometimes, on smaller deals, the underwriter will get noncash compensation in the form of warrants and stock in addition to the spread.5

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