Question

How can FI invest in high-risk assets with funding provided by low-risk liabilities from savers?

a) By leveraging their capital
b) By avoiding high-risk assets
c) By relying on government subsidies
d) By restricting their investment options

Answer 1

FI can invest in high-risk assets with funding provided by low-risk liabilities by leveraging their capital.

Step-by-step explanation:

FI (Financial Institutions) can invest in high-risk assets with funding provided by low-risk liabilities from savers by leveraging their capital. Leveraging involves using borrowed funds or debt to finance investments. Financial institutions can borrow money from banks or issue bonds to obtain funds that can then be used to invest in high-risk assets.

For example, a bank can borrow money by issuing bonds with low interest rates to savers. The bank can then use these funds to invest in high-risk assets such as stocks or venture capital. If the investments generate high returns, the bank can repay the bondholders with interest and make a profit.

By leveraging their capital, financial institutions can take advantage of the potential high returns of high-risk assets while minimizing the risk to their own capital.