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Investment banking sits at the heart of how capital moves through the economy—and understanding these functions means understanding how companies grow, how markets stay liquid, and how major corporate transformations happen. You're being tested on more than just definitions here; examiners want to see that you grasp the intermediary role investment banks play between those who need capital and those who supply it, and how different functions serve different stages of a company's lifecycle.
Think of investment banks as financial architects and matchmakers rolled into one. Whether a startup wants to go public, a corporation needs to acquire a competitor, or a government must issue bonds, investment banks provide the expertise, networks, and risk-bearing capacity to make it happen. Don't just memorize what each function does—know why companies need it, when they'd use it, and how it connects to broader concepts like market efficiency, information asymmetry, and capital allocation.
These functions help companies access funding by connecting them with investors. Investment banks reduce information asymmetry between issuers and investors while bearing some of the risk involved in bringing new securities to market.
Compare: IPOs vs. Debt Issuance—both raise capital through underwriting, but IPOs dilute ownership while debt creates fixed obligations. If an FRQ asks about a company's capital structure decision, consider which option preserves control versus which minimizes cost of capital.
Beyond capital raising, investment banks provide intellectual capital—strategic advice that helps companies navigate complex transactions and maximize shareholder value.
Compare: M&A Advisory vs. Corporate Restructuring—both involve major corporate transformation, but M&A typically occurs from a position of strength (growth strategy) while restructuring often addresses weakness (survival strategy). Know which scenario calls for which service.
These functions ensure securities markets operate efficiently by providing liquidity, facilitating price discovery, and enabling investors to execute trades.
Compare: Market Making vs. Securities Trading—market making focuses on providing liquidity and earning bid-ask spreads, while trading seeks directional profits from price movements. Post-2008 regulations like the Volcker Rule restricted proprietary trading at banks, making this distinction exam-relevant.
This function bridges companies' funding needs with appropriate investor bases, selecting the optimal method based on company stage, size, and strategic objectives.
Compare: Public Offerings vs. Private Placements—public offerings access larger capital pools but require extensive disclosure and SEC registration; private placements are faster and cheaper but limit the investor base. FRQs may ask you to recommend the appropriate method for a given company scenario.
| Concept | Best Examples |
|---|---|
| Primary market activities | Underwriting, IPOs, Debt Issuance, Private Placements |
| Secondary market activities | Market Making, Securities Trading |
| Strategic advisory | M&A Advisory, Corporate Restructuring, Financial Advisory |
| Equity capital raising | IPOs, Private Placements, Seasoned Equity Offerings |
| Debt capital raising | Bond Underwriting, Debt Issuance, Private Debt Placement |
| Risk-bearing functions | Underwriting (firm commitment), Market Making |
| Information production | Due Diligence, Valuation Analysis, Research |
| Liquidity provision | Market Making, Securities Trading |
Which two investment banking functions both involve the bank taking securities onto its own balance sheet, and how do their profit mechanisms differ?
A mid-sized technology company wants to raise $$50 million quickly without extensive public disclosure. Which capital raising method would you recommend, and what trade-offs should the company consider?
Compare and contrast the role of an investment bank in an IPO versus in an M&A transaction—what skills overlap, and what differs?
How does the Volcker Rule affect the relationship between market making and proprietary trading at major investment banks?
If an FRQ presents a company facing financial distress with excessive debt, which investment banking functions would be most relevant, and what specific services might the bank provide?