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Question 1: Give a single line definition of the following.

1) Credit risk

This is a risk which arises when loans are not repaid. It is avoided by diversification and checking credit worthiness.

2) Interest-rate risk

The assets and liabilities of a bank are sensitive to interest rate but liabilities are of short term and assets of long term so by an increase in interest rate banks have the risk that value of assets fall more than that of liabilities affecting the net worth or capital of bank.

3) Liquidity risk

It is a risk associated with a sudden increase in demand of funds. If bank can not meet the withdrawal requirement of all its customers, bank is considered illiquid and it may fail.