Define liquidity and solvency and provide examples.

• A. Liquidity is how quickly assets can be converted to cash; solvency is the ability to meet long-term obligations; e.g., cash vs home equity.
• B. Liquidity is the ability to meet long-term obligations; Solvency is how quickly assets can be converted to cash; e.g., stocks vs bonds.
• C. Liquidity is the interest rate on loans; Solvency is credit score.
• D. Liquidity is tax efficiency; Solvency is investment diversification.

Answer: (A)