• The ease with which investments can be converted to cash at their present market value. Liquidity is significantly affected by the number of buyers and sellers trading a given security and the number of units of the security available for trading.
• A firm's ability to satisfy its short-term obligations as they come due.
• A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes.
• A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.
• The ability of a company to convert assets into cash or equivalents without significant loss. Good liquidity enables a company to earn discounts, maintain a good credit rating, meet obligations promptly, and take advantage of market opportunities.
• Is a characteristic of a market where size and speed of executions are sufficient to absorb many orders with little disturbance in price and in a timely manner.
| ||Embedded terms in definition|
In the money
| ||Referenced Terms|
| ||Accounts receivable: Short term assets reflecting the amount owed by customers from the sale of product or services on creditMoney owed to a business for merchandise or services sold on an open account. It is found on the Balance Sheet under Current Assets. It is used in analyzing a company's Liquidity.Money owed by customers.|
| ||Acid test ratio: Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.Is another term to describe the Quick Asset Ratio. It measures an organization's Liquidity by adjusting current assets by subtracting inventories and then dividing by the current liabilities.See Quick Ratio.|
| ||Cash: The ready currency to which all liquid assets can be reduced.The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.Is a term used in several ways. Sometimes refers to immediate funds, the settlement payment on the trade date, instruments which display high degrees of Liquidity and act as cash equivalents, or the spot market.|
| ||Current ratio: A measure of Liquidity calculated by dividing the firm's current assets by its current liabilities.Refers to the amount of an entity's current assets divided by the amount of current liabilities.Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.Indicator of company's ability to pay short-term obligations, calculated by dividing current assets by current liabilities. Used to compare companies within a single industry. The higher the ratio, the more Liquid the company.|
| ||Discount rate: Is the interest rate used for adjusting for the time value of money for Net Present Value, Option Pricing or other Market Models. It can also refer to the rate that the Federal Reserve charges its members.Also known as the Capitalization Rate. The interest rate charged by the twelve Federal Reserve Banks for short-term loans made to member banks. This is the rate used in discounting future cash flows.The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term Liquidity needs, and not a device to increase earnings.In corporate finance this is the rate by which you divide the cash flows to obtain present value. Other names for discount rate would be hurdle rate, market rate of capitalization, and opportunity cost of capital. In banking, this is the rate of interest charged by the Fed to member banks that borrow at the discount window. The discount rate is an add-on interest rate.|
| ||Related Terms|
| ||Accounting liquidity|
Liquidity preference hypothesis
Liquidity preference theory
Liquidity theory of the term structure