FRM Part I · FRM Exam Part I · Corporate Bonds
Which bond characteristic is generally associated with lower liquidity and a higher liquidity premium in the corporate bond market?
Small issue size combined with seasoning and infrequent trading is associated with lower liquidity and a higher liquidity premium. Such bonds are held by buy-and-hold investors and are hard to trade, whereas large, new, index-included issues are typically more liquid.
- ALarge issue size and recent issuance
- BInvestment-grade rating and short time to maturity
- CSmall issue size, seasoning for several years and infrequent tradingCorrect
- DInclusion in a widely followed benchmark index
Explanation
Small, older (off-the-run) issues that are held by buy-and-hold investors trade rarely and have wider spreads, so investors demand a higher liquidity premium. Large, new, index-eligible and higher-rated issues tend to be more liquid.
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