the problem in stretching out the maturity of marketable securities is?
greater possibility of loss
The problem in stretching out the maturity of marketable securities is primarily related to interest rate risk and liquidity risk.
Stretching out the maturity of marketable securities refers to an investment strategy where an investor chooses longer-term securities with extended maturity dates. This approach is typically adopted with the intention of achieving higher yields or interest rates compared to short-term investments. However, there are several potential problems associated with this strategy:
1. Interest Rate Risk: As interest rates fluctuate, the value of fixed-income securities can change. When interest rates rise, the market value of existing bonds with lower coupon rates tends to decline. If an investor holds a longer-term security, they are locked into a fixed interest rate for a longer period. If interest rates rise during this time, the investor may be stuck with a lower yield than what is currently available in the market.
2. Liquidity Risk: Marketable securities with longer maturities may have lower liquidity compared to short-term securities. Liquidity refers to the ease of buying or selling the security without causing significant price changes. If an investor needs to sell their longer-term security before its maturity, they may face difficulties finding buyers in the market, or they may have to sell at a discounted price. This lack of liquidity can potentially lead to losses or limited access to funds when they are needed.
3. Opportunity Cost: By holding longer-term securities, investors may miss out on other investment opportunities. If the overall interest rate or investment climate becomes more favorable, investors may not be able to take advantage of it since their capital is tied up in longer-term securities.
To minimize these risks, investors can consider diversifying their portfolio with a mix of securities with varying maturities, stay informed about interest rate trends, and carefully assess their liquidity needs and investment time frame. It is also beneficial to regularly review and rebalance the investment portfolio to adjust the maturity profile based on changing market conditions.