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.

Question

Quizplus · Accepted Answer

Holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk often results in a lower return on investment because these assets typically offer low returns. FIs have to balance their need for liquidity with their desire for higher returns and often invest in riskier assets to achieve higher yields.

Why Do FIs Face a Return or Interest Earnings Penalty