Liquidity Theory

Liquidity means the capacity to produce cash on demand at a reasonable cost. A bank is considered to be liquid if it has ready access to immediately spendable funds to reasonable cost at precisely the time those funds are needed. No doubt, the most liquid asset is cash in the vaults of a bank. It is necessary for a banker to keep a certain percentage of the deposits in the form of liquid cash as reserve, either in his own vaults with central bank. But such liquid cash does not earn anything and remains idle. So the banker should invest his excess money in some assets which are liquid in a nature and any consider liquidity ahead of profitability if there is any question of choice.

There are three different liquidity theories:

  1. Self-liquidating or real bills doctrine
  2. Shift ability theory
  3. Anticipated income theory
Share it:  Cite

More from this Section

  • Corporate notes
    Corporate notes is the debt securities issued by private corporations with original maturities ...
  • All-equity discount rate
    All-equity discount rate is a discount rate in capital budgeting that would be appropriate ...
  • Agent / Agency Agreement
    Agent / Agency Agreement: An agent is an independent person or legal entity that acts ...
  • Air Consignment Note
    Air Consignment Note or Air Waybill is a document which acknowledges receipt by an air ...
  • Special damages
    Special damages are an award for damages that can be determined and documented, such as ...