Final answer:
The incorrect statement is that a financial institution with a positive net worth must be solvent and liquid. Solvency and liquidity are distinct concepts; positive net worth indicates solvency but not necessarily liquidity.
Step-by-step explanation:
Choose the statement that is incorrect:
- A financial institution is illiquid if it has made long-term loans with borrowed funds and is faced with a sudden demand to repay more of what it has borrowed than its available cash.
- A financial institution can be solvent but illiquid.
- If a financial institution's net worth is positive, the institution must be solvent and liquid. (Incorrect)
- A financial institution's net worth is the market value of what it has lent minus the market value of what it has borrowed.
The incorrect statement is "If a financial institution's net worth is positive, the institution must be solvent and liquid." While a positive net worth means the institution is solvent, it doesn't necessarily mean it is liquid. Liquidity refers to the ability to meet short-term obligations or convert assets into cash quickly without a significant loss of value. An institution could be solvent with a positive net worth but still be illiquid if it does not have enough liquid assets to meet its short-term liabilities.