Question

Give an example of a liquid and an illiquid investment. Discuss why you consider each of them to be liquid or illiquid.

Answer 1

Give an example of a liquid and an illiquid investment. Discuss why you consider each of them to be liquid or illiquid.

Liquidity is convertibility to cash at short notice.

A U.S. Treasury bond is an example of a liquid investment for the following reasons:

1. It is readily convertible to cash because there are sure to be buyers of the same , ie.marketability is good.

2. and because of the market,it is easier to convert into cash without much price difference.

3.the yield required by the investor is also low , as he is sure of the saleability

Non-exchange traded bonds or securities or buildings are examples of illiquid investments as

1. they take time to be converted to cash

2. and that too , may fetch very low prices

3. as it is difficult to find the next buyer, the current investor will require higher rates of return.