National Check Professional (NCP) Certification Practice Test

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What is one major concern under Liquidity Risk?

The risk of losing market share
The risk associated with failing to meet obligations
The risk of decreasing interest rates
The risk of regulatory penalties

The correct answer is: The risk associated with failing to meet obligations

Liquidity risk refers to the potential inability of an organization to meet its short-term financial obligations due to an imbalance between its liquid assets and its liabilities. Under this risk, one major concern is indeed the failure to meet obligations as they come due. When an entity lacks sufficient liquid assets or access to funding sources, it may not be able to pay off debts or obligations when required, which can lead to severe consequences, including default or insolvency. This concern highlights the importance of maintaining adequate liquidity buffers and having plans in place to address potential cash flow shortfalls. Thus, understanding liquidity risk is essential for financial stability and operational efficacy, as organizations must ensure they can efficiently meet financial commitments, especially in times of market stress or unforeseen expenses.