Future Business Leaders of America (FBLA) Securities and Investments Practice Test

In the context of underwriting, what does "spread" refer to?

1. The difference between retail and wholesale price

2. The difference between proceeds to the issuer and the POP

3. The total number of shares offered

4. The interest rate charged on bonds

The correct answer is: The difference between proceeds to the issuer and the POP

In the context of underwriting, "spread" specifically refers to the difference between the proceeds that the issuer receives from a securities offering and the public offering price (POP). This spread represents the financial compensation that underwriters receive for their services in facilitating the issuance and sale of securities. It essentially compensates the underwriters for their role in assessing the risk, determining pricing, marketing the offering, and ensuring a successful sale. Thus, the spread is a critical component in the underwriting process as it reflects the cost of raising funds through security issuance. Understanding this concept is essential for anyone involved in securities or investments, as it provides insight into the profitability of underwriting transactions and the relationship between the issuer, underwriters, and investors. The other options, while related to pricing and financial metrics, do not specifically capture the essence of the underwriting spread.