Question

The Carter National Bank is worried because it knows that the municipal bonds it has in its bond portfolio can be difficult to sell quickly. What type of risk would this be an example of?
A) Basis risk.
B) Call risk.
C) Default risk.
D) Inflation risk.

Answer 1

Answer:

liquidity risk

Explanation:

Liquidity risk refers to the risk associated with not being able to fulfill short term debts and obligations. Liquid assets are those assets that can be easily converted to cash, e.g. T-bills, publicly traded stocks.

Illiquid assets are those that cannot be easily converted to cash, e.g. real estate property. It doesn't mean that they are a bad investment, but if the company needs cash fast, they need to look somewhere else.