Investment Banker's Role in Bearing Risk | CTFA Exam Answer

B

The correct answer is B. Underwriting.

Underwriting is a process where an investment banker acts as a middleman between the issuer of a security and potential investors. The investment banker purchases the securities from the issuer at a negotiated price and then resells them to the public for a profit. By doing this, the investment banker bears the risk of not being able to sell the securities at the established price.

Underwriting can take two forms: firm commitment and best efforts offerings. In a firm commitment underwriting, the investment banker agrees to purchase the entire issue from the issuer and then resell it to the public. The investment banker assumes the risk of not being able to sell the securities to the public at a profit.

In a best efforts offering, the investment banker agrees to use its best efforts to sell the securities to the public but does not guarantee that all of the securities will be sold. The investment banker does not assume the risk of not being able to sell the securities at a profit but rather acts as an agent for the issuer and receives a commission on the securities sold.

Shelf registration is a process that allows issuers to register securities with the Securities and Exchange Commission (SEC) in advance of a public offering. This enables the issuer to offer the securities quickly and efficiently when market conditions are favorable.

Making a market is a process where a securities dealer maintains an inventory of a particular security and is willing to buy or sell that security at any time. The dealer earns a profit by buying the security at a lower price and selling it at a higher price. Making a market is not directly related to underwriting.