Liquidity Cushion

AAA

DEFINITION of 'Liquidity Cushion'

A reserve fund for a company or individual made up of highly liquid investments. A liquidity cushion relates to a business or individual holding an ample amount of cash, or other highly liquid assets, in relation to debt, so that a short-term liquidity crunch or other unexpected event will not lead to potentially disastrous consequences.

INVESTOPEDIA EXPLAINS 'Liquidity Cushion'

By maintaining cash reserves in money market instruments, unexpected demands on cash don't require the immediate sale of other less liquid securities, which in most cases would not be in the business's or individual's best interest to sell in order to raise cash. For all intents and purposes, liquidity cushion can also be known as a "rainy day fund."

RELATED TERMS
  1. Money Market

    A segment of the financial market in which financial instruments ...
  2. Risk-Based Capital Requirement

    A rule that establishes minimum required liquid reserves for ...
  3. Cash

    Legal tender or coins that can be used in exchange goods, debt, ...
  4. Liquidity

    1. The degree to which an asset or security can be bought or ...
  5. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  6. Cash Position

    The amount of cash that a company, investment fund or bank has ...
RELATED FAQS
  1. Where do companies keep their cash?

    If you have ever looked over a company's balance sheet, you have no doubt noticed the first account under the current asset ... Read Full Answer >>
  2. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Book value of equity per share (BVPS) is a ratio used in fundamental analysis to compare the amount of a company's shareholders' ... Read Full Answer >>
  3. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  4. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
  5. Is there a way to include intangible assets in book-to-market ratio calculations?

    The book-to-market ratio is used in fundamental analysis to identify whether a company's securities are overvalued or undervalued. ... Read Full Answer >>
  6. When is market to market accounting performed?

    Mark to market accounting is used for substantially all investments or financial instruments held on a corporation's balance ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  2. Investing Basics

    The Working Capital Position

    Learn how to correctly analyze a company's liquidity and beat the average investor.
  3. Investing Basics

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  4. Options & Futures

    Basic Investment Objectives

    You might know about different asset types, but do you know how each type contributes to a particular goal?
  5. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.
  6. Investing Basics

    Explaining Tender Offers

    A tender offer is a broad public offer made by a person or company to purchase all or a portion of the shares of a publicly traded company.
  7. Economics

    What are Capital Goods?

    Capital goods are assets with a useful life of more than one year that are used for the production of income.
  8. Economics

    Understanding Capital Assets

    A capital asset is one that a company plans on owning for more than one year, and uses in the production of revenue.
  9. Fundamental Analysis

    Can Japan's Stewardship Code Turn Passive Funds Into Active Managers?

    Institutional investors in Japan have been criticized for being too cozy with corporates. Can a code force them to focus on the needs of beneficiaries?
  10. Fundamental Analysis

    What is Year-to-Date?

    Year-to-date (YTD) is a term that describes financial results from the beginning of the current year up to the day the financial number is reported.

You May Also Like

Hot Definitions
  1. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  3. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  4. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!