- What is liquidity risk?
- A) The risk of losing investments
- B) The risk of being unable to meet short-term financial obligations
- C) The risk of fluctuating interest rates
- D) The risk of operational failures
- Answer: B) The risk of being unable to meet short-term financial obligations
- Which of the following best describes “liquidity”?
- A) The ability to convert assets into cash quickly
- B) The total value of assets owned
- C) The amount of debt owed by a business
- D) The rate of return on investments
- Answer: A) The ability to convert assets into cash quickly
- What is the primary cause of liquidity risk?
- A) High-interest rates
- B) Poor cash flow management
- C) Market volatility
- D) Inadequate capital structure
- Answer: B) Poor cash flow management
- Which of the following is an example of liquidity risk?
- A) A business cannot pay its suppliers because it cannot convert inventory into cash.
- B) A company experiences a decline in stock prices.
- C) An increase in loan interest rates.
- D) A sudden increase in production costs.
- Answer: A) A business cannot pay its suppliers because it cannot convert inventory into cash.
- What is a common measure of liquidity risk?
- A) Debt-to-equity ratio
- B) Current ratio
- C) Return on assets
- D) Gross profit margin
- Answer: B) Current ratio
- What does a current ratio of less than 1 indicate?
- A) Strong liquidity position
- B) Weak liquidity position
- C) Profitability
- D) High debt levels
- Answer: B) Weak liquidity position
- Which of the following financial instruments is most liquid?
- A) Real estate
- B) Corporate bonds
- C) Treasury bills
- D) Inventory
- Answer: C) Treasury bills
- What is “market liquidity”?
- A) The ability of a business to convert its assets to cash
- B) The ease with which an asset can be bought or sold in the market
- C) The cash flow generated by operations
- D) The total value of liquid assets held
- Answer: B) The ease with which an asset can be bought or sold in the market
- Which of the following can help improve liquidity?
- A) Increasing inventory levels
- B) Selling non-essential assets
- C) Taking on more long-term debt
- D) Reducing cash reserves
- Answer: B) Selling non-essential assets
- What is “liquidity crisis”?
- A) A situation where cash flow exceeds obligations
- B) A financial situation where an entity cannot meet its short-term liabilities
- C) An increase in cash reserves
- D) A market correction
- Answer: B) A financial situation where an entity cannot meet its short-term liabilities
- How can businesses manage liquidity risk?
- A) By ignoring cash flow projections
- B) By maintaining adequate cash reserves
- C) By investing solely in long-term assets
- D) By reducing sales efforts
- Answer: B) By maintaining adequate cash reserves
- What does the “liquidity coverage ratio” (LCR) measure?
- A) The ratio of liquid assets to total liabilities
- B) The ratio of cash reserves to short-term obligations
- C) The profitability of a company
- D) The debt level of a business
- Answer: B) The ratio of cash reserves to short-term obligations
- Which of the following could lead to a liquidity crisis?
- A) Diversified investments
- B) High levels of accounts receivable
- C) Reduced sales revenue
- D) Effective cash flow management
- Answer: C) Reduced sales revenue
- What role does cash flow forecasting play in liquidity management?
- A) It helps predict long-term profitability.
- B) It assists in planning for future cash needs.
- C) It is irrelevant to liquidity risk.
- D) It focuses solely on fixed asset investments.
- Answer: B) It assists in planning for future cash needs.
- What is a “liquidity buffer”?
- A) Excess cash held to cover unexpected expenses
- B) An investment in long-term assets
- C) A strategy to increase debt
- D) A ratio of liquid to illiquid assets
- Answer: A) Excess cash held to cover unexpected expenses
- Which of the following is a consequence of poor liquidity management?
- A) Increased investment opportunities
- B) Higher interest rates on loans
- C) Improved supplier relationships
- D) Enhanced credit ratings
- Answer: B) Higher interest rates on loans
- What is “asset-liability mismatch”?
- A) A situation where assets exceed liabilities
- B) The risk arising from the differences in maturity of assets and liabilities
- C) A balance between current and long-term assets
- D) The total liabilities of a company
- Answer: B) The risk arising from the differences in maturity of assets and liabilities
- Which financial ratio indicates a company’s ability to cover its short-term liabilities?
- A) Return on equity
- B) Current ratio
- C) Debt-to-asset ratio
- D) Price-to-earnings ratio
- Answer: B) Current ratio
- What is a “cash flow statement”?
- A) A report showing profitability over a period
- B) A document detailing the sources and uses of cash within a business
- C) A balance sheet reflecting assets and liabilities
- D) A summary of sales transactions
- Answer: B) A document detailing the sources and uses of cash within a business
- How can companies enhance their liquidity position during economic downturns?
- A) By increasing debt levels
- B) By selling assets and reducing costs
- C) By investing in illiquid assets
- D) By increasing inventory
- Answer: B) By selling assets and reducing costs
- What does “operational liquidity” refer to?
- A) The liquidity of investments
- B) The availability of cash to meet daily operational needs
- C) The liquidity of long-term assets
- D) The liquidity of market securities
- Answer: B) The availability of cash to meet daily operational needs
- Which of the following can be a short-term solution to liquidity problems?
- A) Issuing long-term bonds
- B) Taking out a short-term loan
- C) Increasing fixed asset investments
- D) Delaying accounts payable
- Answer: B) Taking out a short-term loan
- What impact does increasing accounts payable have on liquidity?
- A) It improves liquidity by delaying cash outflows.
- B) It decreases liquidity by increasing short-term obligations.
- C) It has no impact on liquidity.
- D) It increases cash reserves.
- Answer: A) It improves liquidity by delaying cash outflows.
- What is the impact of a high leverage ratio on liquidity?
- A) It improves liquidity.
- B) It decreases liquidity.
- C) It has no impact on liquidity.
- D) It stabilizes cash flows.
- Answer: B) It decreases liquidity.
- What does “reverse factoring” aim to improve?
- A) Long-term investment returns
- B) Supplier liquidity and cash flow
- C) Corporate credit ratings
- D) Operational efficiency
- Answer: B) Supplier liquidity and cash flow
- What can a sudden increase in withdrawal requests indicate for a bank?
- A) Strong liquidity
- B) A potential liquidity crisis
- C) Improved customer confidence
- D) Increased profitability
- Answer: B) A potential liquidity crisis
- Which of the following strategies can help mitigate liquidity risk?
- A) Investing heavily in illiquid assets
- B) Regular cash flow analysis and forecasting
- C) Ignoring market conditions
- D) Reducing cash reserves
- Answer: B) Regular cash flow analysis and forecasting
- How does “short-selling” affect liquidity in the market?
- A) It decreases market liquidity.
- B) It has no effect on liquidity.
- C) It increases market liquidity by allowing more trading.
- D) It reduces the number of available shares.
- Answer: C) It increases market liquidity by allowing more trading.
- What does the term “liquidity risk premium” refer to?
- A) The additional return expected by investors for holding illiquid assets
- B) The cost of maintaining liquid assets
- C) The interest rate on liquid cash
- D) The loss incurred from liquidity crises
- Answer: A) The additional return expected by investors for holding illiquid assets
- Which financial policy can reduce liquidity risk for businesses?
- A) Minimizing cash reserves
- B) Maintaining a diverse portfolio of assets
- C) Reducing cash flow forecasts
- D) Focusing on long-term projects only
- Answer: B) Maintaining a diverse portfolio of assets