What is the liquidity trade-off?

Question

Quizplus · Accepted Answer

The liquidity trade-off refers to the balance between maintaining enough liquid assets to meet obligations and earning a higher return on other assets. This means that a company needs to ensure it has enough cash or readily convertible assets to cover its obligations, but it also needs to invest excess funds to earn a higher return. However, investing too much in illiquid assets can create cash shortages and liquidity issues. Therefore, maintaining an appropriate level of liquidity to meet short-term obligations while investing excess cash in higher-yielding assets is the ideal trade-off.

What Is the Liquidity Trade-Off