Final answer:
In best efforts underwriting, the risk of new securities being sold at a loss is transferred from the issuing firm to the underwriter. The underwriter bears the financial risk and is responsible for finding buyers for the securities. If the underwriter is unable to sell all the securities, they must purchase the unsold securities themselves.
Step-by-step explanation:
In best efforts underwriting, the risk of new securities being sold at a loss is transferred from the issuing firm to the underwriter. This means that if the securities are sold at a loss, it is the underwriter who bears the financial risk, not the issuing firm. The underwriter is responsible for finding buyers for the securities and agrees to purchase any unsold securities at a predetermined price.
For example, if a company wants to issue bonds and decides to use best efforts underwriting, the underwriter will try to sell the bonds to investors. If the underwriter is unable to sell all the bonds at the desired price, they will need to purchase the unsold bonds themselves. This ensures that the issuing company does not bear the risk of selling the securities at a loss.