21. More liquid bonds have _____ yields since they are easier to sell. The difference in...
21. More liquid bonds have _____ yields since they are easier to sell. The difference in the yields between less liquid bonds and more liquid bonds (all else equal) is called the _____.
1) higher; liquidity premium
2) higher; maturity risk premium
3) lower; liquidity premium
4) lower; maturity risk premium
Homework Answers
The answer to the question is
3) lower; liquidity premium
The reason is simple that the bonds which are not liquid enough will demand a higher yield, as it is not easy to find a buyer for the bonds which are less liquid. And vice versa.
Thus,
More liquid bonds have lower yields since they are easier to sell. The difference in the yields between less liquid bonds and more liquid bonds (all else equal) is called the liquidity premium.
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21. More liquid bonds have _____ yields since they are easier to
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