Final answer:
In a firm commitment method, an investment bank acts as a principal, taking on the risk of unsold securities when reselling shares to the public. The correct answer to the student's question is B)
Step-by-step explanation:
The firm commitment method is a process where an investment bank buys all the shares from the company intending to go public (initial public offering, or IPO) and then resells these shares to the public. During this process, the investment bank acts as a principal, because it takes on the risk of the unsold securities should there be less interest from the public than initially anticipated.
The correct answer to the student's question is B) Principal. As the investment bank takes on significant risk in this arrangement, it differentiates this method from others where the bank might act as an agent or broker, merely facilitating the transaction without taking on the risk itself.
The investment bank guarantees to purchase all the securities from the issuer and then resells them to investors. This is in contrast to the agency method where the investment bank acts as an intermediary between the issuer and investors.