Q. Which of the following statements best describes “Liquidity”?
[A] It refers to the uncertainty about the value of an asset.
[B] It can be defined as the process of Investing in several different assets with unrelated risks
[C] The ability to convert a store of value to cash
[D] The amount that will be repaid at the end of a bondu2019s term
Answer: C
Notes:
Liquidity is the ability to convert the value of an asset into purchasing power without losing much of its value. Cash is the most liquid of all assets because it can be used to purchase things. Other assets, such as bonds, must first be sold to use that wealth to buy something.
The practice of investing in different assets with unrelated risks is called diversification. When someone engages in diversification, they lower the overall risk of holding a collection of assets, even if the risk of each individual asset is unchanged.
The amount that will be repaid at the end of a bond’s term is its face value, which is sometimes also called par value.
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