nonmarketable security

Nonmarketable security

Securities that cannot be easily bought and sold.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Nonmarketable Security

A security that may not be bought or sold. Generally, a nonnegotiable security may be redeemed by the issuer, but this is often subject to some limitations. Low-risk instruments such as savings bonds and certificates of deposit are examples of nonnegotiable securities. They are also called nonnegotiable securities and nontradeable securities.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

nonmarketable security

A security that may not be sold by one investor to another. This type of security is generally redeemable by the issuer, although within certain limitations. U.S. Treasury savings bonds and most certificates of deposit are nonmarketable securities. Also called nonnegotiable security.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
This article will show that it would be suboptimal for a seller to accept a DLOM under the fair value conditions set out in Accounting Standards Codification (ASC) Topic 820, "Fair Value Measurement." Under fair value conditions, applying a DLOM creates an opportunity to make risk-free profits (or arbitrage) between the marketable and nonmarketable security, which can lead to significant distortions from a financial reporting perspective.
One can demonstrate this result more formally by considering the nonmarketable security to be a derivative of the underlying marketable security.
The payoff of the nonmarketable security occurs at the end of the nonmarketable period and is equal to the fair value of the marketable security.
Because the cost of hedging the nonmarketable security is the current price of the marketable security, it follows that applying a DLOM creates an opportunity to make risk-free profits, or arbitrage.
Assume an investor holds a nonmarketable security valued at $80, and that the security's otherwise identical marketable counterpart is valued at $100 (i.e., there is a 20% DLOM).
In addition, the nonmarketable security may be contractually precluded from being used as collateral, or the holders prohibited from hedging their position.
After two years, the fair value of the nonmarketable security will equal that of the marketable security.
A nonmarketable security is equivalent to a marketable security less the ability to sell the security over the nonmarketable period.
However, if the transferred item is a nonmarketable security, such as an LLC interest, it is not clear what is considered adequate disclosure.
Research suggests that a 25% to 35% or even higher discount is necessary to induce people to hold a nonmarketable security. Black-Scholes, without adjustment, assumes that the option is marketable.