Liquidity risk is financial risk due to uncertain liquidity. What can cause this to happen?
  1. A firm’s credit rating falls.
  2. A firm experiences sudden unexpected cash outflows.
  3. A firm’s market experiences a loss in liquidity.
  4. All of the above.
Explanation
Uncertain liquidity can happen because of all three reasons.

Key Takeaway: Liquidity problems cause many institutions to sell valuable assets at a discount in order to get cash to fund operations. For instance, endowments must sometimes sell mutual funds that have performed well to fund university operations if many of their investments are tied up in illiquid assets such as real estate, commodities, and private equity funds.
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