FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client holds an investment in a non-traded Real Estate Investment Trust (REIT) and wishes to sell it. They discover that there is no active secondary market for the shares and that redemption options with the issuer are limited or subject to significant penalties. This situation best describes which type of risk?
- ALiquidity Risk
- BCredit Risk
- CMarket Risk
- DInterest Rate Risk
Show answer & explanationAnswer & explanation
Correct answer: A. Liquidity Risk
Liquidity risk refers to the difficulty of converting an investment into cash quickly without a significant loss in value. Non-traded REITs are known for their lack of a robust secondary market and limited redemption programs, making them highly illiquid.
Why the other options are wrong
- B. Credit risk is the risk that the issuer of a debt security will default on its obligations, which is not directly related to the ability to sell a non-traded REIT.
- C. Market risk is the risk that the overall market declines, affecting the value of the investment, but not its ability to be sold.
- D. Interest rate risk is the risk that changes in interest rates will affect the value of fixed-income investments, not the ability to sell.
Non-Traded REIT Liquidity Risk
The risk associated with the difficulty of selling shares of a non-traded Real Estate Investment Trust (REIT) quickly and without a significant loss in value.
- Non-traded REITs are not listed on national exchanges.
- They often have limited or no secondary market for their shares.
- Redemption programs, if available, may be infrequent, limited in size, or subject to penalties.
Memory trick: Illiquid assets are hard to SELL; they have LACK of LIQUIDITY.