The Terrell State Bank is a small bank located in Guyman,Oklahoma.All of its loans are agriculture and small business loans in Guyman.It wants to buy a municipal bond from the state of South Carolina.What type of risk is it likely trying to reduce with this purchase?
A)Credit risk
B)Interest-rate risk
C)Business risk
D)Call risk
E)Prepayment risk

Question

Quizplus · Accepted Answer

By purchasing a municipal bond from a different state and sector, the Terrell State Bank is diversifying its investments beyond its local, sector-specific loans (agriculture and small business in Guyman, Oklahoma). This diversification helps to mitigate business risk associated with concentrating investments in a single economic sector or geographic area.

The Terrell State Bank Is a Small Bank Located in Guyman,Oklahoma.All