Currency and Transferable Deposit Accounts are the most liquid financial instruments. They are exchangeable on demand, without financial penalty, for any other financial instrument or for non-financial goods and services. This group of financial instruments are known as broad money (M2).
Other Deposits constitutes the second class of financial instruments, since they are close substitutes to currency and other transferable deposit accounts. Although the majority of such accounts are subject to formal limitations on their transferability and maturity, in practice, they are exchangeable on demand against a penalty. Furthermore, their formal maturity is usually short. Included are time and saving deposits.
Securities form the third group of financial instruments. Securities such as bills, bonds, stocks and shares are usually issued and traded in organized markets, and their liquidity is high in terms of negotiability.
Loans, the least liquid instruments, are defined as instruments where the lenders receive a non-negotiable instrument or no security evidencing the transaction. All financial instruments other than currency, deposits, and securities are classified as loans.
In the framework of Money and Banking Statistics two additional distinctions are made when categorizing financial instruments:
(i) Accounts Payable in National Currency versus Accounts Payable in Foreign Currency, and
(ii) Accounts with Maturity Less than One Year versus Accounts with Maturity One Year or Longer.
For most financial instruments, the existence of a creditor/debtor relationship is obvious. However, for three specific assets this relationship is non-existing: monetary gold, corporate equity securities (shares) and SDRs.
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