Liquidity risk is defined as the risk that an investor may not be able to do what in a timely manner without incurring a price concession?

• A. The risk that you may not be able to sell the investment quickly without a price concession.
• B. The risk of a declining market price due to general market movements.
• C. The risk of borrower default on principal.
• D. The risk of reinvesting cash flows.

Answer: (A)

Liquidity risk is about how easily you can turn an investment into cash without taking a big loss. If you need to sell quickly and there aren’t many buyers, you may have to accept a lower price to complete the sale—a price concession. That idea is exactly what the correct option describes: the risk of not being able to sell promptly without cutting the price. The other risks describe different concepts: market risk relates to price movements from overall market conditions, credit risk is the chance a borrower won’t repay, and reinvestment risk is the risk you’ll have to reinvest cash flows at lower rates.