the firm may hold excess funds in anticipation of cash outlay.when funds are being held for other than immediate transaction purposes, they should be converted from cash into interest-earning marketable securities which should be of highest investment grade usually consist of treasury bills, commercial paper, certification of time deposits from commercial banks
realistically, management of cash and marketable securities cannot be separated. management of one implies management of other
reasons for holding marketable securities
there are several reasons for holding marketable securities such as
1. they serve as a substitute for cash balances
many firms prefer to hold marketable securities as a substitute for transaction balances, precautionary balances, for speculative balances of for all three. in most cases the securities are held primarily for precautionary purposes or as a guard against a possible shortage of bank credit.
2. they held as a temporary investment where a return is earned while funds are temporarily idle.
3. they are built up to meet known financial requirements such as tax payments, maturing bond issue and so on.
factors influencing the choice of marketable securities
among the factors that will influence the choice of marketable securities
1. risk such as
a. default risk. the risk that the issuer of the security can not pay the principal or interest at due dates.
b. interest rate risk. the risk of declines in market values of the security due to rising interest rate
c. inflation rate. the risk that inflation will reduce the real value of the investment. in periods of rising prices, inflation risk is lower on investments whose returns tend to rise with inflation than on investment whose return are fixed.
2. maturity
MARKETABLE SECURITIES held should mature or can be sold at the same time cost is required.
3. yield or returns on securities. generally, the higher a security's risk the higher its required return. corporate investors, like other investors must make a trade-off between risk and return when choosing marketable securities. because these securities are generally held either for specific known need or for use in emergencies, the portfolio should consist of highly liquid short-term securities issued by the government or very strong corporations. treasurers should not sacrifice safety for higher rates of return.
4. Marketability (liquidity) risk
this refers to the risk that securities cannot be sold at close to the quoted market price and is closely associated with liquidity risk.
Marketable securities are those securitues which can be marketed. eg- we can market the share of any company, debentures can also be marketed, and liquidity of these instruments become very high. while we can't market some instruments, like savings schemes of Post offices and also the liquidity of such instruments become so low. so, cash is different thing and it has nothing to do with marketable securities. because the concept of marketable security is different.Cash can be compare with marketable securities on the basis of its liquidity.
Liquidity and Safety
1. In the management of cash and marketable securities why should the primary concern be for safety and liquidity rather than maximizing of profit? Justify your views.
Businesses often avoid using marketable securities extensively for financing due to their inherent volatility and the associated risk of fluctuating market values. Additionally, relying heavily on marketable securities can limit a company's liquidity and flexibility, as these assets may need to be sold at a loss during unfavorable market conditions. Furthermore, the costs and complexities of managing a portfolio of marketable securities can outweigh the benefits, leading firms to prefer more stable financing options like loans or retained earnings.
Liquidity ratio are designed to test a company's ability to meet its short-term financial obligations. To find the ratio, you take Cash and Cash Equivalent + Marketable Securities + Accounts Receivable divided by Current Liabilities.
Non-marketable securities are financial instruments that cannot be easily bought or sold on public exchanges due to a lack of liquidity. Examples include private equity investments, certain bonds, and shares in privately held companies. These securities typically have restrictions on transferability and may require a long-term commitment from investors. As a result, they often carry higher risks but can also offer potential for higher returns.
kmkm
Yes, quick ratio only incorporates those assets which immediately can be converted into cash like cash, marketable securities etc. and not included debtors or inventory
Liquidity is used to describe how quickly securities can be traded.
Quick ratio is very important to assess the liquidity condition of company as compare to current liabilities, so that in case of emergency repayment or cash required how much money can be arrange by selling current assets like marketable securities or inventory etc.
A liquidity statement is a financial document that assesses an individual's or organization's ability to meet short-term obligations using its liquid assets. It typically outlines the total value of cash and assets that can quickly be converted to cash, such as marketable securities, minus any current liabilities. This statement helps stakeholders evaluate financial health and operational efficiency. By analyzing liquidity, businesses can ensure they have sufficient resources to manage unexpected expenses or downturns.
The decision made for the management of current asset that affects a firm's liquidity.