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Types of Underwriting. There are basically three different types of underwriting: loans, insurance, and securities.
There are several different kinds of underwriting agreements: the firm commitment agreement, the best efforts agreement, the mini-maxi agreement, the all or none agreement, and the standby agreement.
Underwritten Offering. Consider an example where the issue is $5 million. In a best efforts offering, the underwriter is given the option to purchase the entire issue of $5 million. If there is investor demand for only $3 million of the issue, the underwriter could purchase $3 million of the issue to sell to investors.
For securities, the underwriters will look at the financial situation of the issuer, such as their income statements, cash flow, debts, and any other potential liabilities, before pricing a bond or stock issue. They will also examine the issuer's credit rating, the institutional equivalent of a personal credit score.
For instance, an insurance company uses underwriting to judge applicants for coverage and decide whether to accept or deny their application. Similarly, a mortgage lender relies on underwriting to evaluate a loan application and determine whether to approve or reject a home loan.