Question

Which type of account typically has low liquidity?

Answer 1

I believe the answer is: D. certificate of deposit

An account is considered to has 'low liquidity' if it is hard to be transformed into cash or direct purchase right away.

Certificate of deposit is a form of investment with a FIXED maturity date (usually the maturity date take more than 3 months). This means that one you purchase a certificate of deposit, you have no way to touch the account until the it reached maturity date.

Answer 2

Option (d) is the correct option.

Certificate of deposit has low liquidity because the money can be withdrawn after the maturity period. It cannot be converted to cash immediately.

Further Explanation:

Liquidity:

Liquidity is a measurement of an asset’s ability to convert it into cash. If any specific asset can be converted into cash quickly, then it is considered a liquid asset.  

Example: Stock, Debtors, Marketable securities are liquid assets as they can be converted into cash very quickly. On the other hand, land and building are not liquid assets as they would require a longer time to convert into cash.

Low liquidity account:

Certificate of deposit is a low liquidity account.

Certificate of deposit:

Certificate of deposit is a saving account. In certificate of deposit, the customer of the bank deposits lump-sum amount in the bank account, and it can be withdrawn after a specified time. Certificate of deposit has a higher interest rate than a normal saving account. Generally, the tenure of the certificate of deposit varies from 1 year to 10 years. The customer of the bank cannot withdraw the funds before the maturity date of the deposit.

Certificate of deposit has lower liquidity because the funds cannot be withdrawn before the maturity date of the deposits. Once deposited, the funds can be converted to cash after the maturity period, which varies from 1 year to 10 years as per the agreement with the customer.  

Certificate of deposit has low liquidity because the money can be withdrawn after the maturity period. It cannot be converted to cash immediately

Checking account, savings account, and money market account has high liquidity as money can be readily withdrawn from these accounts.

Learn more:

1. Learn more about cash budget

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2. Learn more about the role of money

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3. Learn more about the cash deficiency

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Answer details:

Grade: Senior School

Subject: Business Studies

Chapter: Money and Banking

Keywords: Account, Bank account, Bank, Liquidity, High liquidity, Low liquidity, Saving account, Checking account, Money market account, Certificate of deposit, Converted to cash.