What term is used to describe a financial institution's ability to meet long-term obligations?

What term is used to describe a financial institution's ability to meet long-term obligations?

• A. Liquidity
• B. Solvency
• C. Profitability
• D. Creditworthiness

Answer: (B)

The term that describes a financial institution's ability to meet long-term obligations is solvency. Solvency indicates whether an institution has enough assets to cover its long-term liabilities, which is essential for its stability and continuity. A solvent institution possesses sufficient resources to pay off its debts as they come due and sustain operations over time. Understanding solvency is key for assessing the financial health of a bank or company, as it reflects the entity's capacity to endure financial stress and its overall financial strategy. In contrast, liquidity focuses more on short-term obligations and the immediate availability of cash or liquid assets, while profitability pertains to the institution's ability to generate earnings. Creditworthiness relates to the likelihood of repaying borrowed funds but does not explicitly address the asset-to-liability relationship necessary to assess long-term obligations.

The term that describes a financial institution's ability to meet long-term obligations is solvency. Solvency indicates whether an institution has enough assets to cover its long-term liabilities, which is essential for its stability and continuity. A solvent institution possesses sufficient resources to pay off its debts as they come due and sustain operations over time.

Understanding solvency is key for assessing the financial health of a bank or company, as it reflects the entity's capacity to endure financial stress and its overall financial strategy. In contrast, liquidity focuses more on short-term obligations and the immediate availability of cash or liquid assets, while profitability pertains to the institution's ability to generate earnings. Creditworthiness relates to the likelihood of repaying borrowed funds but does not explicitly address the asset-to-liability relationship necessary to assess long-term obligations.