What is the definition of underwriting risk in bond purchasing?

Underwriting risk in bond purchasing refers specifically to the risks that an underwriter takes on when they agree to buy a bond issue from the issuer and then sell it to investors. This risk arises from the possibility that the bonds may not be sold at the anticipated price or that market conditions could change unfavorably, leading to potential financial losses for the underwriter.

When underwriters purchase bonds, they take on the responsibility of distributing those bonds to investors; if the market conditions are poor or if there is reduced demand for those specific bonds, the underwriter may find themselves holding the bonds longer than expected or selling them at a discount. This definition captures the essence of underwriting risk, as it emphasizes the financial vulnerability associated with the process of bond issuance and distribution.