Liquidity Risk MCQs [in Business]

  • 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