Final answer:
The given statement is true as long-term solvency risk analysis evaluates a firm's ability to make scheduled interest and principal payments on its debts. Volatility in interest rates can significantly impact banks due to the asset-liability time mismatch.
Step-by-step explanation:
The analysis of long-term solvency risk is indeed focused on a firm's ability to meet its long-term financial obligations, including making interest and principal payments on debt as they become due.
Firms that demonstrate a capacity to generate significant revenue and profits can establish a credible expectation for paying interest, allowing them to secure financing through various means such as banks or issuing bonds. The risk associated with borrowing, particularly from banks, involves the asset-liability time mismatch. This condition occurs when customer deposits, which are bank liabilities, can be withdrawn in the short term, while assets like loans and bonds are expected to be repaid over a longer period. A situation where the bank is paying more in interest to depositors than receiving from loans can cause financial instability and potentially lead to its failure.
The analysis of long-term solvency risk refers to a firm's ability to meet its long-term debt obligations, including making interest and principal payments as they come due. This analysis helps assess the firm's financial health and determine its ability to repay its long-term debts.