Higher transaction costs of selling an asset make the asset:

Question

BlackTom AI · Accepted Answer

Liquidity refers to how quickly and cheaply an asset can be converted into cash without a significant loss of value. Transaction costs (commissions, bid-ask spreads, taxes, search costs) are part of the “cheapest” dimension: higher transaction costs raise the effective cost of converting the asset to cash and therefore reduce liquidity.

1) Relevant knowledge points and concepts
- Liquidity: speed and low cost of conversion to cash.
- Transaction costs: fees or losses incurred when selling (reduce net proceeds).
- Money is the benchmark of liquidity (no conversion cost and instant use).

2) Step-by-step reasoning
- If selling an asset requires higher transaction costs, an owner receives less net cash when they sell or must wait longer to find a buyer willing to absorb those costs.
- Higher costs discourage quick transactions and make it harder to trade frequently or at predictable prices.
- Therefore the asset becomes harder and more expensive to convert to cash — i.e., less liquid.

3) Simple numerical illustration
- Suppose market price = $100. With a 1% transaction cost, net proceeds = 100 − 1%×100 = $99.
- With a 5% transaction cost, net proceeds = 100 − 5%×100 = $95.
- The larger transaction cost reduces the effective cash you get and raises the friction of selling.

4) Why the correct answer is correct
- The defining feature of liquidity is low frictions to convert into cash. Higher transaction costs increase frictions, so the asset’s liquidity declines. Thus “less liquid” is the correct characterization.

5) Why the other options are incorrect
- a. more liquid: contradicts the definition; higher costs reduce, not increase, ease of sale.
- b. more valuable: increased selling costs lower net value to holder; they do not increase intrinsic value.
- c. more like money: money is defined by minimal conversion cost and immediate use; higher transaction costs make an asset less like money.

6) Conclusion
Higher transaction costs of selling an asset make the asset less liquid. This confirms answer d.

Higher transaction costs of selling an asset make the asset:Single choice

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