Investment bankers are commonly compensated for their services through a best efforts or a firm commitment method. Explain how the two compensation methods work
What will be an ideal response?
Answer: IBs are compensated in one of two ways. With a best efforts arrangement, the IB pledges its best efforts to sell the firm's securities and takes a commission on each sale. However, there is no guarantee that the issue will be fully subscribed. With a firm commitment arrangement, the IB guarantees a payout to the firm. A profit is made on the difference between the actual proceeds from the sale and the guaranteed payoff to the firm.
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