Answer: Funding liquidity risk

## Explanation Financial institutions do not always fail because of the inability to generate a profit. Rather, it's the inability to meet short-term financial obligations that often leads to bankruptcy. This is known as **funding liquidity risk**. When Tohonday decides to invest in long-term assets, it must take into account its day-to-day funding requirements, especially because funds invested in long-term assets cannot be realized quickly enough to meet short-term debts and other unforeseen obligations, such as lawsuits. **Why B is correct:** - Funding liquidity risk refers to the risk that an institution cannot meet its short-term financial obligations - Long-term bonds are less liquid and cannot be quickly converted to cash - This creates an immediate operational concern for meeting daily funding needs **Why other options are incorrect:** - **A (Trading liquidity risk)**: This is the risk of not being able to execute transactions at prevailing market prices, not the primary operational concern for funding - **C (Interest rate risk)**: This relates to fluctuations in market interest rates affecting portfolio values, not immediate operational funding - **D (Market risk)**: This encompasses broader price movements in markets, not the specific operational funding concern The Northern Rock example illustrates this perfectly - they had long-term mortgage assets but couldn't meet short-term obligations, leading to a liquidity crisis.

Author: Tanishq Prabhu