When a bank issues relatively safe debt and uses it to fund relatively risky assets it is creating:
A) liquidity risk.
B) credit risk.
C) interest rate risk.
D) contingency risk.

Question

Quizplus · Accepted Answer

When a bank issues relatively safe debt and uses it to fund relatively risky assets, it is essentially taking on credit risk. This is because the bank is exposed to the possibility that the borrowers of the risky assets may default, leading to potential losses for the bank.

When a Bank Issues Relatively Safe Debt and Uses It