Choose the statement that is incorrect.
A)A financial institution's net worth is the market value of what it has lent minus the market value of what it has borrowed.
B)Insolvency and illiquidity were at the core of a global financial meltdown in 2007- 2008.
C)A financial institution can be solvent but illiquid.
D)If a financial institution's net worth is negative, the institution is solvent.
E)A firm is illiquid if it has made long- term loans with borrowed funds and is faced with a sudden demand to repay more of what is has borrowed than its available cash.

Question

Quizplus · Accepted Answer

If a financial institution's net worth is negative, it means that its liabilities exceed its assets, which indicates insolvency. Solvency means that the institution has enough assets to cover its liabilities. Therefore, a negative net worth indicates insolvency, not solvency.

Choose the Statement That Is Incorrect