What is the risk stemming from insufficient capital to offset a sudden decline in asset value termed___________?
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Answer: A. insolvency risk
Explanation
Insolvency risk occurs when capital reserves cannot absorb sudden asset declines. Insufficient capital leaves a firm vulnerable to bankruptcy during market shocks. Asset value drops exceeding equity capital trigger immediate insolvency concerns. Capital adequacy standards protect financial institutions from sudden insolvency. Balance sheets must maintain positive net worth to ensure business survival. Leverage amplifies both potential gains and losses for corporate entities.
Bank regulators enforce strict capital requirements to prevent systemic insolvencies. Corporate treasurers monitor leverage ratios to avoid financial distress events. Credit rating agencies downgrade firms with high insolvency vulnerability. Solvency risk is a broader term, but insolvency risk specifically fits capital shortfalls. Balanced risk describes portfolio equilibrium rather than a capital deficit. Unbalanced risk is not a standard financial term used for capital adequacy.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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