Question

1. Even though bond markets are larger than equity markets, bond markets tend to be less liquid than equity markets. Evaluate the words in italics. True or False?

1. True

2. False

Answer 1

True,

Bond markets are huge but they trade in OTC(Over the counter) market unlike the stocks which trade on formal exchanges.Since stocks are trading in formal exchanges, you can always find the opposite party(buyer or seller) for your transaction, which is always not true with OTC market. So, equity markets are more liquid.If you also consider the cash flows, bonds gives you fixed cashflows and lower returns where as equity securities fetches you higher returns with variable cash flows