Question

Short-term financing is risky because of the possibility of rising short-term rates and the inability to pay off debt within a

short period of time.
a) true
b) false

Answer 1

Short-term financing is considered risky because of potential interest rate increases and the pressure to repay debts quickly. The concern is compounded by a bank's asset-liability time mismatch, creating financial instability particularly when interest rates rise.

Therefore, this statement is true.

Step-by-step explanation:

Short-term financing is indeed risky because it is subject to the possibility of rising short-term rates and the challenges of paying off the debt within a short period of time. The statement is true. Banks face the challenge of an asset-liability time mismatch, where the bank's liabilities, such as customer deposits, can be withdrawn in the short term, while its assets, like loans and bonds, are repaid over the longer term. This discrepancy can lead to financial instability, especially if interest rates rise. Banks might have to pay out more in interest to depositors than they receive from borrowers if they increase the interest rates paid to depositors to maintain competitiveness.