The underwriter’s profit or compensation in an initial public offering (IPO). It is equal to the difference between the offering price and the amount the underwriter agrees to pay the issuing company. For an underwriter to realize this discount, the entire issue must be sold to investors at the specified re-offering price. In the cases where a lead underwriter forms a selling group (underwriting syndicate and other firms) to increase marketing power of the issue, the underwriter discount is divided among the lead underwriter and members of the selling group. Logically, the underwriter discount is directly correlated with a deal’s riskiness: the riskier the deal, the higher the gross spread, and vice versa.
The underwriter discount is also referred to as an gross spread.
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