Marketable Securities
Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price. The liquidity of marketable securities comes from the fact that the maturities tend to be less than one year, and that the rates at which they can be bought or sold have little effect on prices.
Definition: Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price. Their liquidity comes from their short maturity, often less than a year, and the fact that buying or selling them has little impact on their price. Common marketable securities include Treasury bills, commercial paper, and banker's acceptances.
Origin: The concept of marketable securities originated with the development of financial markets, particularly in the early 20th century. As financial markets matured, businesses and governments needed tools to quickly raise funds. The emergence of marketable securities met this need by providing convenient short-term financing.
Categories and Characteristics: Marketable securities can be categorized into the following types:
- Treasury Bills: Issued by the government, with maturities ranging from a few days to a year, low risk, and high liquidity.
- Commercial Paper: Issued by large corporations for short-term financing, typically with maturities of up to 270 days, and higher interest rates.
- Banker's Acceptances: Bank-endorsed bills, usually used in international trade, with maturities ranging from 30 to 180 days.
Specific Cases:
- Case One: A company needs to raise funds quickly to pay suppliers, so it issues commercial paper. Investors buy these papers, providing the company with the needed funds, and in return, investors receive the principal and interest upon maturity.
- Case Two: The government issues Treasury bills to address a budget deficit. Investors purchase these bills, providing the government with short-term funds, and in return, investors receive the principal and interest upon maturity.
Common Questions:
- What are the risks of marketable securities? The risks of marketable securities are relatively low but not nonexistent. Treasury bills have the lowest risk as they are backed by the government, while commercial paper carries higher risk as it depends on the issuing company's creditworthiness.
- What are the returns on marketable securities? The returns on marketable securities are usually low due to their low risk and short maturities. Investors should choose suitable marketable securities based on their risk tolerance and funding needs.
