Question

Should government debts exist to provide a liquid security? Explain why or why not.

Answer 1

Government debts should exists to provide liquidity because it is the government security and it comes with highest level of liquidity after cash and with minimum credit risk. So, these types of debt securities are ideal to rescue firms when it needs to fullfil the short term debt obligation of the firms.

Further, holding government debt as a part of assets, other than the cash, is the part of cash management that helps firms to earn interest when idle cash is used to acquire government debt securities.