Question

Explain the principles of liquidity, safety and profitability.

Answer 1

Liquidity refers to the ability of an asset to convert into cash without loss within short time.

safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value.

Profitability is simply the capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs and expenses related to earning the income.

Answer 2

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The principles of Liquidity, Safety and Profitablity of a Commercial Bank are explained below :

$\underline{ \bold{ \red{ \: \: Principle \: \: of \: \: Liquidity : \mapsto \: \: }}} \\ \\ \: \: \: \: \: \: \: \: \: \: \: \: \text{The principle of liquidity is one of the } \\ \text{important principle for the commercial bank. } \\ \text{The term Liquidity refers to the ability of an } \\ \text{asset to convert into cash without loss within } \\ \text{a short time. Therefore, paying the deposited } \\ \text{money on demand of customers of the bank } \\ \text{is called liquidity in the sense of banking.}$

$\underline{ \bold{ \red{ \: \: Principles \: \: of \: \: Safety \: : \mapsto \: }}} \\ \\ \: \: \: \: \: \: \: \: \: \: \: \text{The principle of Safety of commercial } \\ \text{bank is said to be the principle of investing } \\ \text{in which an investor only purchases securities } \\ \text{when their market price is significantly below } \\ \text{their intrinsic value. A commercial bank } \\ \text{accepts deposits from its customers and then } \\ \text{invests it. But, since the bank is investing the } \\ \text{investor’s money , it keeps the} \\ \text{safety of the money first.}$

$\underline{ \bold{ \red{ \: \: Principles \: \: of \: \: Profitability : \mapsto \: }}} \\ \\ \: \: \: \: \: \: \: \: \: \: \: \: \: \: \text{Generating profit is one of the primary } \\ \text{objective of a commercial bank. As a } \\ \text{commercial bank is also a commercial } \\ \text{enterprise, so, it tries to generate profits. For } \\ \text{earning profit, the commercial banks have to } \\ \text{invest in various sides by providing short-term } \\ \text{loans in certain rate of interest. }$