Liquidity is an important chapter in financial accounting. It is a topic of great interest for investors.Â Liquidity is essential without which trading is impossible. Therefore, students must have a clear concept on the subject. However, the subject is not so simple and includes lots of chapters.
With a proper understanding of liquidity, you can write liquidity homework answers in a comprehensive way. Those who are having an in-depth knowledge in liquidity can easily convert their assets into money on a short notice.
Description of liquidity:
Whenever an emergency arises, we need money very urgently. Liquidity enables you to access money whenever you want. It might be your emergency savings or the cash available to you that you can use at an event of any financial crisis.
It also enables an investor to grab opportunities. Cash, checkable account, and savings account are the examples of liquid assets as you can easily convert them into cash as per your requirement.
In liquidity homework answers students often need to describe different forms of liquidity and mention the different ways of converting assets into money.
Given below three common liquidity methods:
It is the highest form of liquidity that earns no interest because cash is deposited for a specific period. Generally, any business organization set aside minimum 5% of its overall assets as a cash balance.
However, the percentage varies depending on the nature of the business. In a case of cash oriented business, an organization can maintain up to 20% of the overall assets as a cash balance.
This facility is only for business with a current account. A lender does not give any interest on the amounts in a current account. The lender fixes the overdraft limit depending on the business credentials.
They are the short-term investment tools to get a return on those funds which are temporarily idle. Its basic characteristic affects the degree of their liquidity or marketability. For becoming liquid, a security should have two basic characteristics:Â safety of principal and a ready market.
Ready marketability reduces the time for converting a security into cash. Another determinant of liquidity is that there should be very little or negligible loss in the value of marketable security in due course.
The securities which you can easily transform into cash without any compensation in the principal amount are eligible for short-term investments. Thus, they give a lower return as there is lower risk of losing principal.
Factors to note
A financial manager must consider the given factors for choosing a proper marketable security:
Interest rate risk
Financial or default risk
some common forms of marketable securities are bankers’ acceptances, units, treasury bills, etc.
An efficient liquidity teacher must describe you the concepts of liquidity and liquidity risk so they students can write liquidity homework answers easily. They must give an overview of the various liquidity concepts.
Â Important chapters in liquidity are as follow:
Liquidity risk means that risk when a firm or lender unable to fulfill short term financial needs. Such risk arises because of the inability to transform a security or hard asset into cash without any kind of capital loss or income in the process.
This chapter explains the working function of liquidity and how it creates risks with examples.Â It is important to have knowledge on liquidity and risks associated with it because buyers and owners of long term assets must consider the salability of assets while taking into account their own short term financial requirements.Â Assets with higher liquidity risk loss their values due to the increased possibility of capital loss.
It measures the difference between a person or organization’s overall liquid assets and the total number of liabilities assumed by them. Liquidity mismatch risk or liquidity mismatch is a way of gauging the level of financial risk.
Lenders or investors must assess liquidity gap either a single time or multiple times to compare any change in the gap. Sometimes, a company also measure its own liquidity gap to know its financial health.
Immediacy means how fast you can complete a trade of a given size at a given cost.
Width means the price of completing a trade of a given size. It also includes commissions.
Depth means the trade size which can be completed at a given price. There is a strong relationship between width and depth.
You can call a market a liquid market if it allows you to trade large volume in lesser time at a low cost.
Liquidity ratios evaluate the potential of an organization to pay off both its existing liabilities along with its long-term liabilities. These ratios indicate the cash levels of a company and the potential to transform other assets into cash to pay off liabilities and other existing obligations.
Some common liquidity ratios are as follow:
(i) Quick Ratio
(ii) Acid Test Ratio
(iii) Current Ratio
(iv) Working capital
(v) Working capital ratio
(vi) Times Interest Earned Ratio
How can you finish writing liquidity homework answers quickly and easily?
Liquidity is a very broad term which includes lots of topics. It is an important subject in financial accounting, and one cannot ignore it.Â To write liquidity homework answers one needs a strong command on the subject.
Homework is usually cased studies, and one needs to read the questions thoroughly before writing the answers. It is a good practice to adopt an open ended approach while writing answers. Students can also take the help of online tutorial services to receive expert guidance on the subject.