Non-monetary assets that are very liquid and may be changed into cash with little effort.
A phrase from financial economics, "near money," also known as "quasi-money" or "cash equivalents," refers to non-monetary assets that are very liquid and may be changed into cash with little effort.
Analysts use this phrase to describe and measure the liquidity and proximity of liquidity for financial assets. Various market situations take near money into the account.
To analyze corporate financial statements and control the money supply, it is crucial to comprehend quasi-money. The examination of cash equivalents may be useful in all forms of wealth management since it serves as a gauge for risk, conversion of cash equivalents, and cash liquidity.
For many years, quasi-money has had a significant impact on financial research and economic issues.
For evaluating liquidity, financial analysts see near money as a key notion. The idea of cash equivalents is used by central banks and economists to determine the various levels of the money supply, with the proximity of cash equivalents used as a criterion for categorizing assets as M1, M2, or M3 assets.
In general, this term refers to all of an entity's highly liquid funds together. The liquidity of foreign currencies will change depending on the actual conversion times. Transaction costs or withdrawal penalties may potentially be other variables impacting near money.
Saving accounts, certificates of deposit (CDs), foreign currency, money market accounts, marketable securities, and Treasury Bills are a few examples of near-money assets.
Most people accepted gold and silver coins as currency up to the 18th century. Since then, bank notes and deposits that may be transferred by check have appeared.
Among less liquid assets, everything the owner has that may be converted into cash nearly instantly is seen as near money.
Where Is Near Money Used?
It is used in many fields, including wealth management, corporate liquidity, and the money supply.
A. Wealth Management
It is helpful when adjusting portfolios for individual investors based on their degrees of risk tolerance. Investors who are less capable of taking risks or less willing to do so will devote more of their portfolio to highly liquid assets, such as cash equivalents.
People who need liquidity frequently will invest in a variety of near-money assets, including Treasury Bills, money market funds, and high-yield savings accounts.
All of these assets produce results that are close to the risk-free rate. Since there is little to no default risk, the holding duration is often brief, and liquidity is strong, the risk-free rate is a suitable reward.
High liquidity may be necessary for a variety of reasons. If one is about to retire, for instance, or if a sizable chunk of money is needed to pay for their child's post-secondary education.
Additionally, some people may not want to take any risks or take the chance of seeing their cash decline due to market fluctuations. Due to its safety and liquidity features, it retains its worth during both economic booms and recessions.
It is a suitable use of assets in these circumstances since investors may be guaranteed safety and can earn at least the risk-free rate in exchange.
B. Corporate Liquidity
For corporate liquidity, also named corporate treasury, to maximize cash management for treasury departments of firms and other organizations, near money is very useful.
The near money of a corporation is shown in the liquidity analysis as the cash and cash equivalents on the balance sheet. It is taken into consideration while assessing an organization's current ratio and fast (acid-test) ratio.
Cash, cash equivalents, marketable securities, and accounts receivable are examples of assets taken into consideration by the quick ratio.
The current ratio, on the other hand, examines assets that are more short-term, such as inventory that may be turned into cash. Both ratios show and compare how liquid a firm is by contrasting the number of assets with the number of current obligations.
Treasury departments must manage a company's cash inflows and outflows as well as its current cash balance to maximize working capital. Treasury departments calculate the amount of cash required to cover upcoming commitments and will do so by maximizing the cash balance.
Extra cash might be invested elsewhere or given back to shareholders. To ensure high liquidity for when the money is needed, cash on hand will be placed in assets with a short time to maturity.
C. Money Supply
The nearness of money is further developed by economists' study of the money supply. They do this by segmenting cash-equivalent assets into tiers of liquidity: M1, M2, and M3.
In general, the Federal Reserve (Fed) has three methods at its disposal to control the money supply: open market operations, the federal funds rate, and bank reserve regulations.
The money supply and its several layers can be changed by adjusting one or all of these factors. As a result, the tiers of the money supply are crucial in thorough analyses of central bank policies.
Federal economists typically take the ramifications for M1, M2, and M3 into account when the decisions are related to central banking. Following are the definitions of M1, M2, And M3:
- M1 excludes near money and concentrates on cash. It comprises all assets held in checking accounts, as well as cash, coins, demand deposits, and other small amounts of money.
- The M2 money supply has intermediate liquidity and contains near money. All of the items in M1, as well as savings accounts, time deposits under $100,000, and retail money market funds, are included.
- The widest evaluation of the money supply is M3. Its conversion allowance is the longest and is sometimes referred to as wide money. M3 consists of M1 and M2, as well as bigger, longer-term time deposits and institutional money market funds.
Difference Between Near Money and Money
It is crucial to distinguish between money and near money in any evaluations of cash equivalents. Cash that is readily available for use as a transactional exchange medium, such as cash in hand or cash in the bank, is included in the definition of money. Converting the money to cash takes some time
Cash must be on hand for individuals and corporations to satisfy urgent obligations.
Depending on the research style, there are several types of near-money assets. When making any kind of financial choice, it is important to take into account how liquid nearby currencies are.
The difference between the two is made clear by looking at some of the uses of money:
Unit of account: Money is a unit of account and a widely used indicator of worth. For instance, prices in stores are stated in terms of money. Near money does not serve this purpose. No one prices goods in Treasury Bills, for example.
Making transactions: We use money directly for transactions, whereas cash equivalents are an indirect medium of exchange that must first be turned into money to be used.
Liquidity: Like money, near money is not completely liquid. It takes time and, occasionally, money to convert near money. Examples of this include currency exchanges or a penalty charge for taking your money out before the agreed date.
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Researched and authored by Ely Karam | LinkedIn
Reviewed and edited by James Fazeli-Sinaki | LinkedIn
Uploaded and revised by Omair Reza Laskar | LinkedIn
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