Question

Which of the following statements regarding liquidity risk in correct? Explain why Asset liquidity risk arises...

  1. Which of the following statements regarding liquidity risk in correct? Explain why
    1. Asset liquidity risk arises when a financial institution cannot meet payment obligations.
    2. Flight to quality is usually reflected in a decrease in the yield spread between corporate and government debt issuances.
    3. Yield spread between on-the-run and off-the-run securities mainly captures the liquidity premium.
    4. Funding liquidity risk can be managed by setting limits on certain asset markets or products and by means of diversification.
0 0
Add a comment Improve this question Transcribed image text
Answer #1

A.) Incorrect.
Asset liquidity risk is the risk of not finding the buyers for the asset to be sold at a good price in market. Such risk arises when there is less demand for the asset being sold. Less demand makes it difficult for the asset seller to convert the asset into cash.

B) Correct
Flight to quality in a corporate debt can be seen in the decrease of spreads between the corporate debt and government debt.
For example- Government bonds in India have a yeild of 5% whereas, a company issuing debt would issue a bond at a yeild of 8%. The inverstors here find the company to be riskier than the Indian government and therefore require a premium of 8%-5%=3%. We can also say that the company's bonds are trading at a spread of 3%.

C.) Correct
On the run bonds are the most recently issued bonds whereas off the run bonds are securities issued a good time ago. On the run securities usually have higher liquidity than similar off the run securities, which is why they are traded with a premium compared to similar off the run securities. Higher prices means lower yields for on the run securities compared to off the run securities.

D) Incorrect
Funding liquidity risk is the risk a corporation faces when it is unable to cater it's short term obligations to pay it's creditors. Reason for usually not having enough cash or marketable securities to pay off the creditors.
It is more concerned to the corporation's operating cash flows rather than it's trading activities in the market. Which is why putting limits on certain asset markets or diversification will not be useful.

Add a comment
Know the answer?
Add Answer to:
Which of the following statements regarding liquidity risk in correct? Explain why Asset liquidity risk arises...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Q1.Which one of the following statements is not true? a. Asset-side risk arises from transactions that...

    Q1.Which one of the following statements is not true? a. Asset-side risk arises from transactions that result in a transfer of cash to some other asset, such as the exercise of a loan commitment or a line of credit b. Liability-side risk arises from transactions whereby shareholders of the financial institution claim cash returns on their equity Investments c. Liquidity risk occurs because of situations that develop from economic and financial transactions d. Liquidity risk is reflected on either the...

  • 9. Which of the following statements is (are) correct? (x) Insurance companies protect individuals and corporations...

    9. Which of the following statements is (are) correct? (x) Insurance companies protect individuals and corporations (policyholders) from financially adverse events. (y) Securities firms and investment banks underwrite securities and engage in related activities such as securities brokerage, securities trading, and making markets in which securities trade (z) Mutual funds pool many individuals’ and companies’ financial resources and invest those resources in diversified asset portfolios. A. (x), (y) and (z) B. (x) and (y) only C. (x) and (z) only...

  • 1) Present value calculations: A) are appropriate for investments in the same time period B) are...

    1) Present value calculations: A) are appropriate for investments in the same time period B) are accurate only in a low-rate environment C) provide comparisons for investments when inflation is known D) provide a common reference for measuring investments at different maturities 2) Compounding refers to: A) the calculation of interest rates after allowing for the effect of taxes B) the process of earning interest on interest of an investment C) the repayment of both interest and principal at the...

  • Compute and Interpret Liquidity, Solvency and Coverage Ratios Balance sheets and income statements for Lockheed Martin...

    Compute and Interpret Liquidity, Solvency and Coverage Ratios Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements. Income Statement Year Ended December 31 (In millions) 2005 2004 2003 Net sales Products $ 31,518 $ 30,202 $ 27,290 Service 5,695 5,324 4,534 37,213 35,526 31,824 Cost of sales Products 28,800 27,879 25,306 Service 5,073 4,765 4,099 Unallocated coporate costs 803 914 443 34,676 33,558 29,848 2,537 1,968 1,976 Other income (expenses),...

  • MULTIPLE CHOICE 1) Which of the following is NOT an investment as defined in the text?...

    MULTIPLE CHOICE 1) Which of the following is NOT an investment as defined in the text? A) a certificate of deposit issued by a bank B) a new automobile C) a United States Saving Bond D) a mutual fund held in a retirement account 2) Which of the following is NOT traded in the securities markets? A) stocks B) bonds C) derivatives D) real estate 3) The governmental agency that oversees the capital markets is the A) Federal Trade Commission....

  • With $2.3 Trillion Injection, Fed’s Plan Far Exceeds Its 2008 Rescue The Federal Reserve said it...

    With $2.3 Trillion Injection, Fed’s Plan Far Exceeds Its 2008 Rescue The Federal Reserve said it would buy some municipal bonds and some riskier debt to help governments and companies. The Federal Reserve said it could pump $2.3 trillion into the economy through new and expanded programs it announced on Thursday, ramping up its efforts to help companies and state and local governments suffering financial damage from the coronavirus. The central bank rolled out its relief package just as the...

  • Refer to the following financial statements and answer the following questions hints:- 13. cash provided (used)...

    Refer to the following financial statements and answer the following questions hints:- 13. cash provided (used) by operating activities, investing activities, and financing activities. 14. cash-based net income. 15. estimate of uncollectible accounts receivable. 16. calculate and interpret accounts receivable ratio (most recent and prior period). hints:- 2:12 PM Wed Apr 15 39%). A 51.04cdn.com PART II NIKE, Inc. Consolidated Statements of Income in mWors, except per share data) Revenues Cost of sales Gross profit Demand creation expense Operating overhead...

  •   1. When it comes to financial matters, the views of Aristotle can be stated as:...

      1. When it comes to financial matters, the views of Aristotle can be stated as: a. usury is nature’s way of helping each other. b. the fact that money is barren makes it the ideal medium of exchange. c. charging interest is immoral because money is not productive. d. when you lend money, it grows more money. e. interest is too high if it can’t be paid back.  2. Since 2008, when the monetary base was about $800 billion,...

  • 1. Analyze the major challanges USB faced in the last 5 years, in your opinion, what were the cru...

    1. Analyze the major challanges USB faced in the last 5 years, in your opinion, what were the crucial factors in the banks downturn? 2. what are the main triggers to change the banks approach to communication and what is different today regarding the dealings and relationship to its share-and stakeholders? 3. How would you evaluate the constant replacement of the banks chairman and CEO? 4. in view of the future strategy of USB, what are your suggestions in order...

  • 1. Analyze the major challanges USB faced in the last 5 years, in your opinion, what...

    1. Analyze the major challanges USB faced in the last 5 years, in your opinion, what were the crucial factors in the banks downturn? 2. what are the main triggers to change the banks approach to communication and what is different today regarding the dealings and relationship to its share-and stakeholders? 3. How would you evaluate the constant replacement of the banks chairman and CEO? 4. in view of the future strategy of USB, what are your suggestions in order...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT