Question

(b) What are the three major sources of bank liquidity? What are the two major uses?

(c) Discuss the risk-return trade-off in the context of liquidity risk.

Answer 1

(b)Three major source of bank liquidity is;

1.Certificate of deposit

2.Discounting bills of exchange

3.Commercial paper

Uses of bank liquidity

1.Provide loan to individual,partnership firm anf company.

2.Provide ovedraft facility to their existing customer.

(c) risk-return trade-off in the context of liquidity risk.-

All decisions of finance manager focused on shareholders wealth maximization for the same he must manage liquidity risk associated to investment.

Here liquidity risk means unavailablity of cash  when liablity is payable. so, it can not only effect the goodwill of firm but also make condition unfavourable to get best deal with trade creditors.For the same most firm calculte current ratio or liquidity ratio for managing risk and return.