Why are less than perfect liquid financial assets createdThey are important in business since they help solve a financial problem within relatively shorter period of time as compared to perfect liquid assets the will yield cash quickly. For instance real estate will take some days or weeks to convert to cash. Certificate of deposits will also take some days to do so. They are also accompanied by penalties in their conversion to cash. Savings will also take some days before they are converted to cash, however these assets needs less efforts to convert them although they do not forgive immediate cash like share of stock and bondsWhy are perfectly liquid financial assets created?This is for the reason that, they take form of cash easily hence easily converted to immediate cash. They can be held by the public as well as earning interest making it very easy to get cash from them. That can be carried effortlessly from one location to another where there is an immediate buyer hence creating immediate cash (Beliaeva, 56). They can be freely traded for other assets or goods which would yield the cash immediately.Financial assets are not perfectly liquid since.It is advised that companies should not depend entirely on financial assets since they are realized when you receive cash from clients, trade goods on credit besides the buying of short period investments hence they are not immediate source of cash. They are transfer when debtors pay hence when they do not pay immediately, cash problem will still be there hence we do not term them as perfectly liquid. They also include account receivables and cash equivalent.Some assets are more liquid than others in regard to the immediate at which we get cash from them for instance share of stock besides bonds. Most perfect liquid assets, are converted to cash in less than a day while the least liquid ones, it will take weeks and may be months to convert them to cash. For instanced real estate.Liquidity is used to understand; (1) interest are more on those securities having more perceived defaults because default securities are not a guarantee that you will you will be paid back by the customer. High interest rate are important to act as a make up for the risks for not getting promised payments or capital repaid back. Hence the high interest rate will be a source of cash to compensate the risk of payment avoidance by the borrower; (2) bid- ask spreads are more for securities traded fewer frequentlyBut bid-ask spreads can be more burdensome when you are using securities that are traded fewer frequently such as minor-company stocks with light exchange volume. The bid-ask spread recompenses the market creator in the security in case it cannot find purchasers for the shares besides the price. Hence to avoid such risks, the bid-ask spreads will act as source of cash for the compensation.2.(a)Duration is measure of sensitivity of any asset?s price to change with in the needed yields because, duration will first of all measure the change in the interest rates of an asset in given period of time. Therefore, the more the asset duration the more the price the asset will yield in mean time. Duration as a measure of sensitivity in price, will give information on how long will it need for the price of a particular asset to be repaid hence enabling us to measure that asset?s yield. However duration will be affected by the marker yield of the asset in the given time. However the price sensitivity of an asset will depend other factors like current yield, time to maturity and yield changes.(b)Duration cannot be compared with maturity although it shows the length of time as shown by maturity for the reason that, duration will give the weighed number of terms for the cash flow on an asset. Hence the more the time until payment are made, the more the duration, however duration is affected by market yield. For motility, the lower the rate of interest which is determined by a certain length of time, the more volatility and the more the maturity the more the volatility of the asset. For some percentage change in cost for a reduction in return to maturity goes up with maturity up to a situation where reduction with maturity on maturity is large enough (Beliaeva, 56). Therefore in measurement of time, maturity will represent the period at which, principal has to be paid back and at the end of the period, the principal is repaid back to the owner of the asset.(c)Duration is the approximation to the real sensitivity of the price to alterations on yield because it will provide the average weighted period of time to each interest on the asset and the principal payment too, hence with combination of all this we get the approximated price of the asset as the yields. Modified duration however will put into account the impacts of interest rate movement during the given period of time which will help come up with the rice.!
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