ACCA Advanced Financial Management (AFM) Practice Exam

What is the main role of an underwriter in the issuing process of securities?

1. To represent the shareholders' interests

2. To buy an issue of securities and resell it to the public

3. To provide legal advice to the company

4. To collect taxes on the securities sold

The correct answer is: To buy an issue of securities and resell it to the public

The primary role of an underwriter in the issuing process of securities is to buy an issue of securities from the company and then resell them to the public. This function is crucial in ensuring that the company is able to raise the necessary capital from the sale of its securities. When a company decides to issue new stocks or bonds, it engages an underwriter, typically an investment bank, to manage the issuance process. The underwriter assesses the market conditions, determines the appropriate pricing, and guarantees the company a certain amount of capital by purchasing the entire issue of securities. This process reduces the risk for the issuing company as the underwriter takes on the responsibility of selling those securities to investors, thus providing liquidity and facilitating the capital-raising process. This role is vital because it helps to bridge the gap between the company looking to raise funds and the investors interested in buying securities. The underwriter’s expertise in pricing and marketing the securities often determines the success of the issuance.