Final answer:
The highest price at which an underwriter can stabilize a new issue is the initial offering price. Stabilization aims to prevent the stock from falling below this price but not to exceed it, to avoid market manipulation.
Step-by-step explanation:
The student has asked about the highest price at which an underwriter can stabilize a new issue. The answer to this question is A) The initial offering price. Stabilization is a measure taken by underwriters to support the secondary market price of a new issue in the immediate aftermath of an offering. The purpose of stabilization is to prevent the stock from falling below its offering price. Should the market price begin to drop, the underwriter can buy shares at the offering price to maintain the stock's value and prevent it from falling further, thus 'stabilizing' the price. The underwriter cannot, however, sell the issue at prices above the initial offering price for stabilization purposes. This is because doing so would not constitute stabilization but rather manipulation of the stock price, which is against regulatory guidelines.
With respect to bonds, the secondary market price can be influenced by a variety of factors such as credit risk, interest rates, and time to maturity. The example given speaks to the impact of changing interest rates on bond prices. If interest rates rise, existing bonds with lower interest rates become less attractive, and their prices can drop below face value to compensate for the lower yield. However, underwriters typically only engage in stabilization measures with stocks, not bonds.