Final answer:
The correct option for a cash equivalent is (a): an investment that can be quickly converted to a known amount of cash and is close enough to maturity that its value does not fluctuate with interest rate changes. Liquidity characterizes how easily assets like cash and cash equivalents can be used for transactions.
The correct answer is option a. an investment readily convertible to a known amount of cash and sufficiently close to maturity so its market value is unaffected by interest rate changes.
Step-by-step explanation:
A cash equivalent is an investment that meets several specific criteria. It should be readily convertible to a known amount of cash and have a maturity date so close that its value would not be affected by interest rate changes. Based on the options provided, option (a) is the correct option: 'an investment readily convertible to a known amount of cash and sufficiently close to maturity so its market value is unaffected by interest rate changes.'
Liquidity is a crucial concept when discussing cash and cash equivalents. The liquidity of an asset refers to how swiftly and easily it can be converted into cash or used like cash to purchase goods or services. Cash itself is highly liquid while cash equivalents are financial assets that aren't used directly as a medium of exchange, like cash in your pocket, but can be quickly converted into cash or a checking account, making them nearly as liquid as cash. This is why M2, which includes cash equivalents such as savings accounts and CDs, is referred to as "near money."