D
Dan
Member
In the context of a market, the terms seem to be used interchangeably by the Institute and ActEd. For example, at the bottom of the ST5 notes page 13, ch 3: "... an investor could expect significantly higher returns from investing in corporate bonds than from investing in Treasury bonds... partly due to the impact of lower corporate bond *liquidity*"
However, CA1(1) examiners in April 2007 q 2 said:
"Marketability is the ability to trade an asset at a given price in given volumes.
It essentially relates to the ease of trading. For example how long it takes to deal and at what cost.
Liquidity is about how close to cash an asset is. It measures how soon the asset will turn into cash without being marketed. For example a seven-day fixed term deposit at a clearing bank might be completely un-marketable, because the deposit cannot be transferred or assigned. It is however extremely liquid. If market conditions change, liquidity is a measure of how the capital value moves. Liquid assets tend to have stable market values."
Therefore, should it not be *marketability* above, since we are necessarily comparing bonds of the same term - which will turn into cash at the same time – so liquidity is not an issue? If so, the examiners' comments below are somewhat hypocritical.
"Most candidates thought marketability and liquidity were synonyms, and struggled to find any difference between the two definitions."
I suspect the real answer is that the terms are sloppily defined.
For examples of *liquidity* used to mean both closeness to cash and marketability,
• in one camp we have liquidity preference theory definitions (short-dated stocks are more liquid since they turn to cash sooner than long-dated ones)
• and in the other camp the definition of liquidity risk in CA1 (capacity of a market to handle traded volume when required) and the Wikipedia page on market liquidity (“A liquid asset has some or more of the following features. It can be sold (1) rapidly, (2) with minimal loss of value, (3) anytime within market hours.”)
However, CA1(1) examiners in April 2007 q 2 said:
"Marketability is the ability to trade an asset at a given price in given volumes.
It essentially relates to the ease of trading. For example how long it takes to deal and at what cost.
Liquidity is about how close to cash an asset is. It measures how soon the asset will turn into cash without being marketed. For example a seven-day fixed term deposit at a clearing bank might be completely un-marketable, because the deposit cannot be transferred or assigned. It is however extremely liquid. If market conditions change, liquidity is a measure of how the capital value moves. Liquid assets tend to have stable market values."
Therefore, should it not be *marketability* above, since we are necessarily comparing bonds of the same term - which will turn into cash at the same time – so liquidity is not an issue? If so, the examiners' comments below are somewhat hypocritical.
"Most candidates thought marketability and liquidity were synonyms, and struggled to find any difference between the two definitions."
I suspect the real answer is that the terms are sloppily defined.
For examples of *liquidity* used to mean both closeness to cash and marketability,
• in one camp we have liquidity preference theory definitions (short-dated stocks are more liquid since they turn to cash sooner than long-dated ones)
• and in the other camp the definition of liquidity risk in CA1 (capacity of a market to handle traded volume when required) and the Wikipedia page on market liquidity (“A liquid asset has some or more of the following features. It can be sold (1) rapidly, (2) with minimal loss of value, (3) anytime within market hours.”)