Banks Face Liquidity Risk Because

question 62

Multiple Choice

Banks face liquidity risk because

• A) they can have difficulty meeting their depositor's demands to withdraw money.
• B) they are unable to borrow from the Federal Reserve.
• C) households and businesses may seek to borrow a large amount of funds in a short period of time.
• D) governments tend to run high budget deficits.

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Definitions:

Guaranteed Investment Certificate

A secure investment that guarantees to return the principal amount plus interest at a specified rate.

Compounded Annually

Interest calculation method where interest is added to the principal at the end of each 12-month period.

Annual Rate of Decline

The percentage at which a value decreases over the course of one year.

Strip Bond

A debt security that has had its principal and coupon payments detached and sold separately as zero-coupon bonds.