Question

Consider the relative liquidity of the following assets: Assets 1. A $5 bill 2. The funds in a savings account 3. A boat you own 4. A bond issued by a publicly traded company Select the assets in order of their liquidity, from most liquid to least liquid.

Answer 1

Answer:

1, 2, 4, 3

Explanation:

To begin with, liquidity is simply defined as the relative ease and/or quickness an asset can be converted to cash, or any other potent medium of exchange.

Now, from the question, we are given the task to rank in order of liquidity.

Option 1 ranks as the most liquid. This is simply because it's already denominated as cash, and a potent means of exchange. Thus, it's readily available.

Option 2 ranks as the second most liquid. Although we are not given the amount involved in the saving account, the most defining feature here is that the saving account is already denominated in cash. It would therefore only takes few moments of processing to retrieve the cash. It ranks as the second most liquid.

Option 4 ranks as the second least liquid. A bond is a debt instrument a company uses to raise finance. A holder of such instrument is called a bondholder. This exercise is usually handled by a broker - a specialist skilled in the procedures. Thus, when an individual subscribe for a bond of a traded company, the processes may be complicated and and complex for some. Hence, it takes time - days or even weeks, and the eventual denomination of the fund into the requisite accounts.

A boat I own is the least liquid. This is simply because it could take days, weeks and even months to find a serious and interested buyer. Negotiations and all could also dictate if the cash receipts is also feasible. It ranks as the least liquid.