Question

Explain the concept of liquidity. Rank the following assets from most liquid to least liquid:

a. Land

b. The inventory of a merchandiser

c. Cash in hand

d. A savings account at a local bank

e. A one-year bond

f. Ordinary shares

Short answer

All of them can be converted into cash and maximum time period can be taken by one-year bond as it has a fixed time period.

Step-by-step solution

Step 1. Introduction

The ease with which an asset, or security, can be changed into immediate cash without impacting its market price is referred to as liquidity. The most liquid asset is cash, while tangible assets are less liquid.

Step 2. Explanation

1. Cash in Hand is most liquid asset.

2. Savings at a local bank- this can be withdrawn whenever possible.

3. Inventory of a merchandiser- Can be converted into liquidity when stock is sold out.

4. Ordinary Shares- Can be converted into liquidity when market falls.

6. Land- Whenever required to sell can convert into cash

7. One Year Bond- In one year it get into cash.