Question

Liquidity risk is reduced by a financial institution:

a. If securities can be sold and converted to cash quickly and easily without any income tax liability.

b. If securities can be converted to cash quickly and easily without incurring significant loss in value.

c. Have lower capital gains potential.

d. Both (a) and (b).

Answer 1

Liquidity is the readibility of an instrument to be sold. when an instrument can be sold easily and can be liquidated easily without incurring any significant losses in its value becomes a liquid asset. Liquidity risk is mitigated by keeping the Liquid Assets. While taxability is not relevant as it depends on the tax laws.

Option B is correct. If securities can be converted to cash quickly and easily without incurring significant loss in value.

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