Legal Definitions - underwriting spread

An underwriting spread is the difference between the price that an underwriter pays to the issuer of a security and the price paid by the public in the initial offering. This spread compensates the underwriter for its services and is made up of the manager's fee, the underwriter's discount, and the selling-group concession or discount.

• When a company wants to issue stocks or bonds, they may hire an investment bank to underwrite the offering. The investment bank will buy the securities from the company at a discounted price and then sell them to the public at a higher price. The difference between the discounted price and the public offering price is the underwriting spread.
• For example, if a company wants to issue $100 million in bonds and the investment bank agrees to underwrite the offering at a discount of 2%, the investment bank will buy the bonds from the company for $98 million. The investment bank will then sell the bonds to the public for $100 million, making a profit of $2 million, which is the underwriting spread.

These examples illustrate how the underwriting spread works in investment banking. The underwriter takes on the risk of buying the securities from the issuer and then selling them to the public. The underwriting spread compensates the underwriter for this risk and for the services provided in bringing the securities to market.