You are currently viewing “LIQUID ASSET”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI

“LIQUID ASSET”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI

Saturday Brain Storming Thought (133) 02/10/2021

COMPILED BY ER. AVINASH KULKARNI

LIQUID ASSET

A liquid asset is an asset that can easily be converted into cash in a short amount of time

Liquid assets can be easily, securely, and quickly exchanged for a legal tender

Liquid assets include things like cash, money market instruments, and marketable securities

Examples of Liquid Assets

1) cash or currency

2) bank accounts

3) accounts receivable

4) mutual funds

5) money market accounts

6) stocks – owned shares

7) treasury bills, notes, and bonds

8) certificates of deposit

9) prepaid expenses

10) retirement investment accounts

Non Liquid assets

Non-liquid assets are a category of assets that aren’t easily converted into cash

Examples of non-liquid assets

1) land and real estate investments

2) equipment

3) art

4) vehicles

5) jewelry and Precious metals

6) collectibles -.an item that some people want to collect as a hobby

Liquidity Ratio

Liquidity ratios measure a company’s ability to pay debt obligations and its margin of safety through the calculation of metrics including current ratio, quick ratio and operating cash flow ratio

Key takeaways of liquid asset

1) asset that can be easily converted into cash within a short amount of time

2) liquid assets generally tend to have liquid markets with high levels of demand and security

3) businesses record liquid assets in the portion of the current assets of their balance sheet

4) business assets are usually broken out through the quick and current ratio methods to analyze liquidity types and solvency

Maximum liquid wealth policy

It restricts the amount of liquidity

Liquid wealth is an asset individual is permitted to maintain while giving them unrestricted access to non-liquid assets

Institutional investor

Institutions have an investment horizon extremely vast allowing them to invest in highly illiquid assets since they are unlikely to be forced to sell them before the term

Liquidity Reserve

It is the need for the cost of maintaining a dedicated stock of liquid assets portfolio

Asset Accumulation

Gather enough liquid assets to then sustain all future living/liability expenses

Liquidity Gap

It is the excess value of the firm’s liquid assets over its volatile liabilities

A company with a negative liquidity gap should focus on their cash balances and possible unexpected changes in their values

Banks Monetary policy for liquid assets

Banks only maintain a small portion of their assets as cash available for immediate withdrawal, the rest is invested in illiquid assets like mortgages and loans

Troubled Asset Relief Program (TARP)

The primary purpose of TARP is to stabilize the financial sector by purchasing illiquid assets from banks and other financial institutions

Liquidity calculation

Liquid assets / short term liabilities

Conversion of liquid assets to risky assets

An increase in leverage and credit spread on all but the safest and most liquid assets may incur a sudden dry up in risky asset markets, which may lead to real effects on the economy

Flight to liquidity

It refers to an abrupt shift in large capital flows towards more liquid assets

Statutory liquidity ratio

It is the number of liquid assets such as precious metals (gold) or other approved securities, that a financial institution must maintain as reserves other than cash

Saving account as a liquid asset

These accounts let customers set aside a portion of their liquid assets while earning a monetary return

Asset-backed security

The pool of assets is typically a group of small and illiquid assets which are unable to be sold individually

Asset liquidity in the banking

Holding assets in a highly liquid form tends to reduce the income from that asset (ie cash has no interest)

So banks will try to reduce liquid assets as far as possible

Hot money

This is especially so in countries with relatively scarce internationally liquid assets

Objectives of liquid asset management

1) manage your cash and understand why you need liquid assets

2) automate your savings

3) choose from among the different types of financial institutions that provide cash management services

4) compare the various cash management alternatives

5) compare rates on the different liquid investment alternatives

6) establish and use a checking account

7) transfer funds electronically and understand how electronic funds transfer (EFTs) work

Managing Liquid Assets

1) cash management is deciding how much to keep in liquid assets and where to keep it

2) with less regulation and more competition, banks and other financial institutions offer an array of account types and investments

3) Goal : pay expenses (including unexpected expenses) without dipping into long-term investments

4) cash management means not only making choices from among alternatives but maintaining and managing the result of those choices

Principle 1: the risk-return trade-off

5) liquid assets have little risk and therefore a low expected return

6) low risk is important in cash management

7) another type of risk associated with liquid assets: the more cash you have, the more you are tempted to spend

Automating Savings: Pay yourself first

1) use cash management alternatives to have savings automatically deducted from your paycheck

2) automating your savings means you are less likely to spend that money

3) the earlier you start to save, the easier it is to achieve your goals

Time value of money

Liquid Asset formula

Current Assets / Current liabilities

Benefits of liquid asset

1) keep cash handy

2) investing benefits

3) less risky

4) improves the financial profile

Disadvantages of liquid assets

1) low-interest rates

2) inflation

3) taxes

4) other considerations

Assets and liquid assets

Liquid assets are money gained from sources such as investments or inheritances

Assets are money gained from your job

Liquid Net Worth

It is what you would have left of you were selling your assets and paying all your debts ie subtract your liabilities from your assets

Liquid net worth counts only your liquid assets

Liquidity Trap

A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war

The characteristics of a liquidity trap are interest rates that are close to zero and changes in the money supply that fail to translate into changes in the price level

High inflation and low inflation can be bad for economy

Compiled by:-

Er. Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer

 

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