Definition of liquidity financial management cs notes

Posted on 29-03-2016        By ADMIN

Definition of liquidity

Cash, cash equivalents and other assets (liquid assets) thatcan be easily converted into cash (liquidated). In the case of a market, astock or a commodity, the extent to which there are sufficient buyers andsellers to ensure that a few buy or sell orders would not move prices verymuch. Some markets are highly liquid; some are relatively illiquid. 

The term also means how easy it is to perform a transaction in a particularsecurity or instrument. A liquid security, such as a share in a large listedcompany or a sovereign bond, is easy to price and can be bought or sold withoutsignificant price impact. With an illiquid instrument, trying to buy or sellmay change the price, if it is even possible to transact. 

Banks need to hold enough to cover expected demands from depositors, creditorsand counterparties. During the global financial crisis it became clear thatmany assets were a lot harder to sell than banks had expected. Now the BaselCommittee plans to require banks to keep enough liquid assets, such ascash and government bonds, to get through a 30-day market crisis. There willalso be a second ratio that tries to match a bank's overall liquidity needs toits liabilities over a longer timeframe. 

Use liquidity in asentence

Being able to come up with liquidity quickly canhelp you make a spur of the moment profitable buy at the right time.

? The bosses were quick to take advantage of the firm's current liquidity andspent almost all of it immediately redecorating the executive suites, gym,conference areas and dining room.

18 people found this helpful  

? Being able to quickly access your liquidity can be thedifference between making a profitable deal and missing out on it.


Comment :