What type of risk does an underwriter face in a competitive sale?

The risk of weaker than anticipated investor demand is particularly relevant in a competitive sale because it directly impacts the success of the underwriting process. In a competitive sale, multiple underwriters are vying to secure the bond issuance, and there is always a possibility that the marketplace may not respond favorably to the offering.

If demand falls short of expectations, the underwriter may struggle to place the bonds with investors, potentially requiring the issuer to lower its price or interest rate to attract buyers. A weak demand can also lead to an oversupply in the market if the bonds are not sold as planned, which can harm the issuer's reputation and future borrowing potential. Ultimately, accurately gauging investor appetite is crucial, as it informs pricing strategies and other assessments related to the underwriting process.

The other choices involve risks that, while important, do not directly correlate with the immediacy and significance of demand assessment in a competitive sale context. Legal liability pertains to the consequences of errors in underwriting, operational risk relates to internal processes that manage the sale, and underperformance risk involves comparisons to market standards, which are not as directly tied to the immediate dynamics of investor demand in competitive scenarios.