Question

6. A fund is met with redemptions and must liquidate some of their holdings. What is their liquidity index? (20 points)

                                  Liq. Value                 Fair Market Value

IBM stock                 $42,000,000             $52,000,000

GE bonds                  $29,000,000             $31,000,000

T-bonds                    $50,000,000             $51,000,000

Answer 1

The liquidity index is the ratio of the fair sale price required to liquidate assets in an emergency situation divided by the fair market value of the assets liquidated.

Particulars	Liq. Value	Fair Market Value	% Invested in each (at FMV)
IBM Stock	$        42,000,000	$          52,000,000	38.52%
GE Bonds	$        29,000,000	$          32,000,000	23.70%
T-Bonds	$        50,000,000	$          51,000,000	37.78%
		$        135,000,000

Liquidity Index = (38.52%*($ 42,000,000/$ 52,000,000))+(23.70%*($ 29,000,000/$ 32,000,000))+(37.78%*($ 50,000,000/$ 51,000,000))

= 89.63 %