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Liquidity

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Definition of Liquidity

Liquidity Image 1

Liquidity

A market is liquid when it has a high level of trading activity, allowing buying and selling with
minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.


Liquidity

A measure of the ability of a business to pay its debts as they fall due – see also working capital.


Liquidity

A term that means nearness to cash; the closer an asset is to becoming cash or a liability is to using cash, the more liquid that asset or liability is.


Liquidity

The ease with which assets or securities can be sold for cash on
short notice at a fair price


liquidity

Ability of an asset to be converted to cash quickly at low cost.


Liquidity

Ease with which an asset can be sold on short notice at a fair price.



Liquidity

The degree to which an asset can be cheaply and quickly turned into money.



Related Terms:

Accounting liquidity

The ease and quickness with which assets can be converted to cash.


Liquidity Image 2

Liquidity Crisis

Situation in which a firm is unable to meet due bills; a period of "technical insolvency".


Liquidity diversification

Investing in a variety of maturities to reduce the price risk to which holding long
bonds exposes the investor.


Liquidity preference hypothesis

The argument that greater liquidity is valuable, all else equal. Also, the
theory that the forward rate exceeds expected future interest rates.


Liquidity premium

Forward rate minus expected future short-term interest rate.


Liquidity ratios

Ratios that measure a firm's ability to meet its short-term financial obligations on time.


Liquidity ratios

Ratios that measure a firm's ability to meet its short-term financial obligations on time.


Liquidity risk

The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
between the "true value" of the asset and the likely price, less commissions.


Liquidity theory of the term structure

A biased expectations theory that asserts that the implied forward
rates will not be a pure estimate of the market's expectations of future interest rates because they embody a
liquidity premium.


Restricted Liquidity

Inability of an individual/company to convert an asset into cash or cash equivalent without significant cost.


Cash Equivalents

Instruments or investments of such high liquidity and safety that they are virtually equal to cash.


Discount rate

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the
Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.



Expectations hypothesis theories

Theories of the term structure of interest rates which include the pure
expectations theory, the liquidity theory of the term structure, and the preferred habitat theory. These theories
hold that each forward rate equals the expected future interest rate for the relevant period. These three theories
differ, however, on whether other factors also affect forward rates, and how.
Expectations theory of forward exchange rates A theory of foreign exchange rates that holds that the
expected future spot foreign exchange rate t periods in the future equals the current t-period forward exchange
rate.


Liquidation

When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers
are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related:
buy in, evening up, offsetliquidity.


Quick ratio

Indicator of a company's financial strength (or weakness). Calculated by taking current assets
less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity
and ability to meet its obligations. Also called the Acid Test ratio.


Relative value

The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to
another, or for a given instrument, of one maturity relative to another.


Term structure

The relationship between the yields on fixed-interest
securities and their maturity dates. Expectation of changes in interest rates
affects term structure, as do liquidity preferences and hedging pressure. A
yield curve is one representation in the term structure.


Thin market

A market in which trading volume is low and in which consequently bid and asked quotes are
wide and the liquidity of the instrument traded is low.


Working capital

The amount of a company’s current assets minus its current liabilities;
it is considered to be a prime measure of its level of liquidity.


Working capital management

The management of current assets and current liabilities to maximize shortterm liquidity.



 

 

 

 

 

 

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