NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
Which of the following best describes 'liquidity risk' for an investor holding a financial asset?
Liquidity risk is the difficulty of converting an asset into cash quickly without a significant loss in value. It differs from credit risk, which concerns issuer default, inflation risk, which erodes purchasing power, and interest rate risk, which arises from changing rates.
- AThe chance that the issuer fails to pay interest on time
- BThe difficulty of converting the asset into cash quickly without a significant loss in valueCorrect
- CThe fall in purchasing power because of rising prices
- DThe change in asset value caused by movements in interest rates
Explanation
Liquidity risk is the risk that an asset cannot be sold quickly at or near its fair value. Non-payment by the issuer is credit risk, loss of purchasing power is inflation risk, and value change from rate movements is interest rate risk.
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