Sometimes a security is only needed temporarily, whether for just one day or a few weeks. They are securities or debts that are to be sold or redeemed within a year. They serve as an interest earning substitute for cash balances and they are used to hold funds that are being accumulated to meet a specific large, near term obligation, such as tax payment or capital expenditure. Some firms need to have a certain percentage of liquidity because of the regulations that their company operates under in the market like banks. Transaction Motive: The transaction motive refers to the cash required by a firm to meet the day to day needs of its business operations.In an ordinary course of business, the firm requires cash to make the payments in the form of salaries, wages, interests, dividends, goods purchased, etc. If cash remains idle, earns nothing but involves cost in terms of interest payable to finance it. Advantages & Disadvantages of Marketable Securities By Meryl Baer Updated March 28, 2017. Motives for Holding Cash. The holding of cash on these reasons are on precaution. ... Firms hold cash to meet uncertainties, emergencies, running out of cash and fluctuations in cash balances. Savings bonds are non-marketable investments that cannot be bought or sold on security exchanges. At any time a security holder can sell this security in the financial market and can collect cash from selling this security..
Mainly, there are three motives for holding cash. Marketable securities are located on the balance sheet. The problem in stretching out the maturity of marketable securities is that A. you are legally locked in until the maturity date. Precautionary balances should, thus, be held more in marketable securities and relatively less in cash. Please keep in mind that it is a research answer and it has to be on a public or private company that generates cash and positive working capital on a regular basis. The amount of cash set aside for precautionary reasons is not expected to earn anything, therefore, the firm should attempt to earn some profit on it. The following points highlight the five main motives for holding cash balances in a firm. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion. 1. give two reasons why business hold marketable securities. Related MCQs? Marketable securities play an important role here.
Precautionary motive – hold cash in case of emergencies What is needed to satisfy the speculative and precautionary motives is an ability to pay quickly – a need that is met with liquidity.
In my opinion the reasons a firm would wish to hold cash or marketable securities all have to do with a necessity for liquidity.
What drives this result?
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