Near Money is a term which describes high liquid non-cash assets that are easily convertible into cash. Also, near money can be called cash equivalents. It is important to know near money when the review of corporate financial statements and the management of money supply is carried out. The proximity of near money to cash conversion can vary depending on the actual time period.
Examples of Near Money
- Savings accounts : Individuals have the option of opening a savings bank account to park the excess funds after appropriation of expenses. Savings account backed by an ATM card gives 24/7 access to the money. However, due to a higher level of liquidity, the rate of interest offered is on the lower side which does not even cover the general inflation cost in the economy.
- Government Treasury Securities : These are also known as Treasury bills (T-bills) issued by the Government treasury. The maturity period is lower and it is backed by a Government guarantee. Such instruments, thereby, have no default risk and no liquidity risk. Thus, the present 364-day treasury bill has an interest rate of only 3.71% (source: rbi.org). One cannot doubt the repaying capacity of the central government. Such instruments are redeemable at par and issued at discount. The difference between the issue price and redemption is the return for the holding period. Such holding period return is then annualized to compute the per annum return.
- Money Market Securities : Banker’s acceptance, certificate of deposits, and commercial papers are some of the classic examples of money market securities. The term of investment is usually up to 1 year. These are more liquid than CDs with years of investment. However, the rate of interest offered in MM securities hardly covers the inflationary rise in costs.
- Liquid Foreign Currencies : Not all foreign currencies are categorized under near money. Liquidity in foreign currencies means the high volume of transactions which facilitates the easy buying and selling of securities. Out of all currencies around the globe, US Dollar is considered to be a liquid foreign currency. Investment or borrowing in USD also facilitates the hedging of foreign trade receivables as well as payables.
- Certificate of Deposits : Can park their money to earn interest higher than that offered by a savings bank account. CDs are considered liquid since the corporate investor can redeem the funds before the maturity date. However, such early redemption comes with a penal interest to be deducted from the interest accrued.
Uses of Near Money
- Wealth Management
- Corporate Treasury
Some differences between money and Near Money
Unit of Account – Money Is a Unit Or Account, It Is a Common Measure Of Value. Prices In Shops, For Example, Are Expressed In Terms Of Money. Near Money Has No Such Function. In Fact, Near Money’s Own Value Is Expressed In Terms Of Money.
Making Transactions – We Use Money Directly For Making Transactions, While Near Money Is An Indirect Medium Of Exchange – We Need To Convert It Into Money First Before It Can Be Used For Transactions.
Liquidity – Money Is 100% Liquid, Near Money Is Not. Converting Near-Money Involves Time.
Advantages of Near Money
- Availability of near money helps lower the usage of credit cards.
- Sufficient near money means sufficiency of liquidity.
- It helps to manage the emergency financial needs of the business.
- It lowers the risk of bankruptcy in the business.
- Also, the credibility of business is increased
- It forms an easy source of leverage for the organization.
Near money is a concept used by investors to explain and measure the liquidity and liquidity closeness for financial assets. In the review of corporate financial statements and the management of money supply, knowing near money and the closeness of near-moneys is important. In all forms of wealth management, near money can also be relevant because its analysis provides a barometer for cash liquidity, cash equivalent conversion, and risk. Thus Near money usually refer comprehensively to all near-money of an entity. The proximity of near-money to cash conversion can vary depending on the actual time period.