An investment bank buys the first issue of stock from XYZ Company at $

QUESTION

An investment bank buys the first issue of stock from XYZ Company at $35 per share. As XYZ’s shares are sold on the secondary securities market, the price falls to $28 a share. Which of the following describes the outcome of this dynamic?

A) The investment bank sells the shares back to XYZ Company at $35 per share.
B) The secondary investors take a loss of $28 per share.
C) The investment bank takes a loss of $7 per share.
D) The secondary investors earn a capital gain of $7 per share.
E) XYZ Company takes a loss of $7 per share.

ANSWER

Answer: C
Explanation: C) If the price of a security falls during an investment bank’s distribution of it, the bank takes the loss. The investment bank bears most of the risk.