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Liquidity Risk Key takeaways * Liquidity risk is the chance an entity cannot meet short-term obligations because it lacks cash or cannot convert assets to cash without significant loss. * It has two main forms: market liquidity risk (unable to sell assets at prevailing prices) and funding liquidity risk (unable to obtain funding when needed)….

Liquidity Ratios Liquidity ratios are financial metrics that evaluate a company’s ability to meet short-term obligations using its short-term assets. They show how easily a business can convert assets into cash to pay bills, payroll, and other immediate liabilities. Why liquidity matters Ensures a company can meet short-term obligations and continue operations. Helps creditors and…

Liquidity Premium: Definition, Why It Matters, and Examples Liquidity premium is the extra return investors demand for holding assets that are difficult or slow to convert into cash at fair market value. Illiquid assets carry higher risk: if you need to sell quickly, you may have to accept a significant discount, and your capital is…

Liquidity Preference Theory Liquidity preference theory explains how people’s desire to hold liquid assets (cash or cash-like instruments) affects interest rates and financial markets. Introduced by John Maynard Keynes, it frames interest rates as the price that balances the public’s demand for liquidity against the supply of money. Key takeaways People generally prefer liquidity for…

Liquidity Event: What it Is and How It Works A liquidity event is an action—such as an acquisition, merger, or initial public offering (IPO)—that lets company founders, early investors, and employees convert previously illiquid equity into cash. It serves as an exit strategy for investors who backed a company during its seed or early rounds…

Liquidity Crisis A liquidity crisis occurs when businesses or financial institutions lack sufficient cash or easily convertible assets to meet short-term obligations. When many firms face this problem at once, it can escalate into system-wide instability, defaults, and bankruptcies. Key takeaways A liquidity crisis is a simultaneous shortage of short-term cash or liquid assets across…

Liquidity Coverage Ratio (LCR) Overview The Liquidity Coverage Ratio (LCR) is a regulatory standard that requires banks to hold enough high-quality liquid assets (HQLA) to cover expected net cash outflows over a 30-day stressed period. Introduced after the 2008 financial crisis as part of the Basel III framework, the LCR aims to reduce short-term liquidity…

Liquidity Adjustment Facility (LAF) What it is A Liquidity Adjustment Facility (LAF) is a central bank tool for managing short-term liquidity in the banking system. Through LAF, commercial banks can borrow from the central bank via repurchase agreements (repos) or lend to the central bank via reverse repos, typically on an overnight basis. Government securities…

Liquidity Liquidity is the ease with which an asset can be converted into cash without materially affecting its market price. Highly liquid assets convert quickly and with little cost; illiquid assets take longer and often require discounts or transaction costs. Types of liquidity Market liquidity: How easily assets can be bought or sold in a…

Understanding Liquidators A liquidator is an individual or firm appointed to wind up a company’s affairs by collecting and selling its assets, settling claims, and distributing proceeds to creditors and, if possible, shareholders. Liquidators are typically appointed by a court, creditors, or shareholders and have fiduciary duties to act ethically and transparently in the interests…

Liquidation Value Liquidation value is the estimated net amount that would be realized from selling a company’s tangible assets—such as cash, inventory, equipment, fixtures, and real estate—after paying liabilities, typically under a quick or forced sale (for example, during bankruptcy). It excludes intangible assets like goodwill, patents, trademarks, and brand value. Why it matters Provides…

Liquidation Preference What it is A liquidation preference is a contractual right that determines the order and amount of payments to investors and creditors when a company is sold, goes bankrupt, or undergoes another liquidation event. It gives preferred shareholders priority over common shareholders and can protect investors (especially venture capitalists) by ensuring they recover…

Liquidation Margin Key takeaways * Liquidation margin is the current value of a margin account, including cash and the market value of open long and short positions. * If the liquidation margin falls below required levels, brokers can issue margin calls and may liquidate positions to cover deficits. * Traders can raise liquidation margin by…

What is liquidation? Liquidation is the process of winding up a business and converting its assets to cash to pay claimants. It typically occurs when a company is insolvent—unable to meet its financial obligations—but can also refer more broadly to selling inventory or securities at discounted prices to raise cash. When and how liquidation happens…

Liquidating Dividend: Definition and Overview A liquidating dividend (also called a liquidating distribution) is a payment a corporation makes to shareholders during a partial or full wind-down of the business. Unlike regular dividends paid from operating profits or retained earnings, a liquidating dividend is paid from the company’s capital base and represents a return of…

Liquidated damages Key takeaways Liquidated damages (LDs) are a pre‑agreed sum in a contract payable if a party breaches the agreement and certain losses are hard to quantify. They are intended to compensate for anticipated, intangible, or difficult‑to‑measure harms — not to punish. Courts will enforce LD clauses only if the amount is a reasonable…

Liquidate: Definition and How the Process Works Key takeaways To liquidate means converting assets into cash, typically by selling them on the open market. Liquidation can be voluntary (to raise cash or wind down a business) or forced (by a broker’s margin call or a bankruptcy proceeding). In bankruptcy liquidations, creditors are paid first, then…

Liquid Market A liquid market is one where many buyers and sellers are available and transactions can be executed quickly at predictable prices and low costs. Liquidity means assets can be converted to cash (or exchanged) without causing large price changes; bid–ask spreads are small and trading can occur in substantial size without materially affecting…

What is a liquid asset? A liquid asset is cash or an item that can be converted into cash quickly and with minimal loss of value. Liquid assets are typically held in active markets with many buyers and sellers and are recorded on a company’s balance sheet as current assets when they are expected to…

Liquid Alternatives (Liquid Alts): Definition, Purposes, Risks, and Examples What are liquid alternatives? Liquid alternatives, or liquid alts, are mutual funds or exchange-traded funds (ETFs) that use investment techniques typical of hedge funds and other alternative investments but offer daily liquidity and lower minimums. They aim to provide diversification and downside protection by pursuing strategies…

Lipper Indexes: What They Are and How They Work Lipper Indexes are benchmarks that track the performance of managed-fund strategies by averaging the returns of the largest publicly traded funds that follow a given strategy. They provide a standardized way to compare actively managed mutual funds across asset classes and investment approaches. How Lipper Indexes…

Lintner’s Model Lintner’s model explains how firms set and adjust dividend payments over time. Introduced by John Lintner in 1956 after studying large public firms, it captures the observed tendency of companies to “smooth” dividends — moving gradually toward a target payout rather than making abrupt changes. Core idea Firms have a long-run target dividend…

Linked Savings Account: Meaning, Benefits, FAQs What is a linked savings account? A linked savings account is a savings account that is connected to another deposit account—typically a checking or negotiable order of withdrawal (NOW) account. Linking makes transfers between accounts easier and often results in a consolidated account statement showing balances for both accounts….

Linearly Weighted Moving Average (LWMA) What is LWMA? A Linearly Weighted Moving Average (LWMA) is a moving average that assigns greater weight to recent data points and progressively less weight to older ones in a linear fashion. Compared with a Simple Moving Average (SMA), LWMA reacts faster to recent price changes and reduces—but does not…

Linear Relationship: Definition, Formula, and Examples What is a linear relationship? A linear relationship between two variables is one that can be represented by a straight line on a Cartesian graph. As one variable changes, the other changes proportionally. Linear relationships appear throughout statistics, economics, physics, and everyday life and are often contrasted with nonlinear…

Line of Credit (LOC): Definition, Types, and How It Works A line of credit (LOC) is a flexible loan that lets a borrower access funds up to a lender-set limit, repay what’s borrowed, and borrow again as needed. Interest is charged only on the outstanding balance, not on the full credit limit. LOCs are offered…

Line of Business Limitations Line of business limitations are a federal income tax rule that affects fringe benefits employers provide to employees. If a company operates in multiple lines of business, an employee who receives a fringe benefit from a line in which they do not work generally must include the value of that benefit…

Line of Best Fit What it is A line of best fit (best-fit line) is a straight line that summarizes the relationship between two variables in a scatter plot by minimizing the distance between the line and the observed data points. It is the primary output of linear regression and is used to identify trends,…

Line Graph A line graph (or line chart) displays how a quantitative variable changes across a continuous interval—most commonly time—by plotting data points and connecting them with straight lines. It’s a simple, effective way to visualize trends, patterns, and comparisons. Key takeaways Connects data points to show changes over a continuous interval (often time). Plotted…

Line Chart: Definition, Types, Uses, and How to Create One What is a line chart? A line chart displays a series of data points connected by a line, most commonly used to show how a value changes over time. In finance, line charts typically plot closing prices at regular intervals (daily, weekly, monthly), producing a…

Lindahl Equilibrium A Lindahl equilibrium is a theoretical outcome for the provision and financing of public goods in which the efficient quantity of a public good is produced and each individual pays a share of the cost that reflects the benefit they receive. It was proposed by Erik Lindahl to create a market-like solution for…

Limited Power of Attorney (LPOA) Key takeaways An LPOA authorizes a designated person (attorney-in-fact) to perform specific financial or investment tasks on behalf of an account holder. It is limited in scope—common powers include buying and selling securities, paying fees, and completing routine account paperwork. Critical powers, such as withdrawing cash or changing beneficiaries, are…

Limited Partnership Unit (LPU) A limited partnership unit (LPU) is an ownership interest in a publicly traded limited partnership, commonly known as a master limited partnership (MLP). Each unit represents a pro rata claim on the partnership’s income and cash distributions. How LPUs work An MLP is a limited partnership whose ownership units trade on…

Limited Partnership (LP) A limited partnership (LP) is a business structure with two classes of partners: at least one general partner who manages the business and assumes unlimited personal liability, and one or more limited partners who contribute capital but do not take part in daily management and whose liability is limited to their investment….

Limited Partner: Definition, Role, and Tax Treatment A limited partner is an investor in a limited partnership (LP) who contributes capital but does not participate in day-to-day management. Their liability for the partnership’s debts is generally limited to the amount they have invested. Key characteristics Must be part of a limited partnership, which by definition…