Final answer:
The firm commitment method involves an investment bank acting as an underwriter, where it buys all the securities from the issuer at a set price and takes on the risk of reselling them to the public.
Step-by-step explanation:
The firm commitment method requires the investment bank to take on the risk of unsold securities and act as an underwriter. When a company issues new securities, such as stocks or bonds, in order to raise capital, it can choose between several methods of distribution. Under the firm commitment method, the investment bank purchases all the available securities from the issuer at a price agreed upon in advance (the underwriting price), and then resells them to the public, aiming to make a profit by selling at a higher price. The bank thus takes on the risk because if the securities cannot be sold at the anticipated price, the investment bank will incur losses. This method contrasts with a best efforts agreement, where the investment bank does not guarantee the sale of securities and simply acts as an agent in the sale process.