Question

Name four characteristics of liquid assets. What are the disadvantages of having too much or too little money held as liquid assets (provide two disadvantages for the two situations)?

Answer 1

Answer:-

The four characteristics of liquid assets are:-

1) Liquid assets can be converted into cash in short duration of time with minimal or no loss in value.
2) These assets can be easily transferable without any constraints and limitations to other parties and third parties.
3) The value of liquid assets is constant and is not limited to any particular region or market but has presence in both local and foreign market and is worth at any given time.
4) Liquid assets has low expected return and are less riskier.

The two disadvantages of having too little money held as liquid assets is:-

1) The company with too little money may not have sufficient capital to run the day to day operations ie the working capital.
2) The little money held in liquid assets may be viewed negatively by creditors and the company may find it difficult to get investors.

The two disadvantages of having too much money held as liquid assets is:-

1) There is no return or interest that we can get from money and can be considered as idle money.
2)  The money which is idle looses the purchasing power with rise in inflation and is worth less the value as the time passes, given if the raw material prices increases dramatically the cash required to buy will be higher thus decreasing the purchase power.