Business firms hold cash and marketable securities for which of the following reasons or motives?

Question

Quizplus · Accepted Answer

Business firms hold cash and marketable securities for three main motives: 
1) Transaction motive: This motive is related to everyday business operations, such as paying bills and salaries, purchasing inventory, and investing in capital projects. To meet these needs, firms need to hold a certain amount of cash balances and easily liquidated securities such as Treasury bills.
2) Precautionary motive: This motive is related to uncertainty and unexpected events, such as a sudden drop in sales or an unexpected expense. To protect themselves from these events, firms hold additional cash reserves and marketable securities that can be sold quickly and easily.
3) Speculative motive: This motive is related to taking advantage of opportunities that arise in financial markets. For example, if a firm expects interest rates to rise, it may hold onto cash and wait for higher returns on new investments. However, this motive is less common and less important than the other two motives. Choice C includes all three motives listed in the correct order.

Business Firms Hold Cash and Marketable Securities for Which of the Following