Definition
Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price. They represent short-term investments made by corporations and include government securities, commercial paper, and banker’s acceptances. Due to their high liquidity, marketable securities are listed under current assets on a company’s balance sheet.
Detailed Explanation
Marketable securities are utilized by companies to manage excess cash efficiently. They are primarily characterized by:
- Liquidity: They can be converted to cash rapidly without significant loss of value.
- Short-term Maturity: Typically, these instruments have maturities of less than one year.
- Low-Risk: They are generally considered low-risk because they often involve financial instruments issued by reputable organizations or governments.
Examples
- Government Securities: These include Treasury bills (T-bills), which are short-term debt securities issued by the government and considered very low-risk.
- Commercial Paper: This is an unsecured, short-term debt instrument issued by a corporation, typically used to finance accounts receivable and inventories.
- Banker’s Acceptances: These are short-term credit investments created by a non-financial firm and guaranteed by a bank to make their payments.
Frequently Asked Questions (FAQs)
Q1: Why are marketable securities considered low-risk? A1: Marketable securities are considered low-risk because they are often issued by highly-rated entities, such as governments or large, reputable corporations, and have a short maturity period, reducing the risk of significant market fluctuations.
Q2: How do marketable securities differ from non-marketable securities? A2: Marketable securities can be easily bought or sold on public markets, while non-marketable securities, such as private company shares or closely held investments, are not easily transferable and lack a public exchange.
Q3: Where are marketable securities listed on a balance sheet? A3: Marketable securities are listed under current assets on a corporation’s balance sheet due to their high liquidity and short-term maturity.
Q4: Can marketable securities affect a company’s financial ratios? A4: Yes, marketable securities can impact various financial ratios, including the company’s liquidity ratios like the current ratio and quick ratio, thereby influencing assessments of the company’s short-term financial health.
Q5: What happens if a company holds marketable securities beyond their maturity date? A5: If held beyond maturity, the company must classify these securities as long-term investments, potentially impacting the company’s liquidity and how these securities are reported on the balance sheet.
Related Terms with Definitions
- Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
- Treasury Bills (T-bills): Short-term government securities with maturities of one year or less sold at a discount from their face value.
- Commercial Paper: An unsecured, short-term debt issued by a corporation with maturities typically less than nine months.
- Banker’s Acceptance: A short-term credit instrument guaranteed by a bank, often used in international trade.
Online References
Suggested Books for Further Studies
- “Financial Accounting” by Robert Libby, Patricia A. Libby, and Frank Hodge
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Corporate Finance” by Jonathan Berk and Peter DeMarzo
Fundamentals of Marketable Securities: Finance Basics Quiz
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