Final answer:
Short-term security liquidity is primarily determined by the perceived risk of the borrower defaulting and the interest rate comparison between the original loan and the current economy rates.
Step-by-step explanation:
The primary determinants of a short-term security's liquidity are generally the perceived riskiness of not being repaid and the comparison between the interest rate charged on the original loan and the current interest rates in the economy. A higher perceived risk of default decreases the amount a financial institution is willing to pay for a loan in the secondary market. Conversely, if the original loan has a higher interest rate than the current rates, institutions may offer more for that loan, considering it a more valuable asset.
For instance, if the Safe and Secure Bank's loans in the secondary market total a value of $5 million, this valuation will have factored in the perceived risk and interest rate at the time of sale compared to current rates. Higher liquidity is associated with lower risk and a favorable interest rate environment.