Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk?
A)These assets carry a reserve requirement tax.
B)These assets offer low returns.
C)These assets offer higher returns that reflect their risk.
D)Inflation increases the purchasing power value of these assets.
E)All of the options.

Question

Quizplus · Accepted Answer

Assets such as cash, T-bills, and T-bonds typically offer low returns compared to alternative investments. Therefore, FIs holding these assets to reduce liquidity risk may face a return or interest earnings penalty.

Why Do FIs Face a Return or Interest Earnings Penalty