Banking Practice Exam

The correct answer, market making, refers to the role of an investment bank or financial institution that facilitates trading by providing liquidity in the market. Market makers buy and sell securities on a regular basis at publicly quoted prices, which helps to ensure that there is a continuous supply of securities available for trading. This activity is vital for maintaining market efficiency, as it enables other participants to buy and sell securities without significant delays or price impacts.

In the context of investment banking, market making involves maintaining a book of inventory by holding securities to meet the demands of buyers and sellers, essentially acting as an intermediary. This allows for smoother transactions and helps in determining fair market prices.

The other choices pertain to different functions within investment banking: underwriting is the process of guaranteeing a sale of new securities by purchasing them from the issuer and then selling them to investors; principal investing involves investing the bank's own capital in securities; and proprietary trading refers to trading financial instruments using the bank's own funds for profit, rather than on behalf of customers. While important, these activities do not encapsulate the dual role of buying and selling securities for liquidity in the market, which is the essence of market making.