Tuesday, May 11, 2010

Marketability or Liquidity Risk

What is considered to be Marketability or Liquidity Risk?

Marketability or Liquidity Risk occurs when a bond issue can be sold at or near its true market value at the time of offering.

In the finance world, the primary measure of marketability or liquidity is the exact size of the point spread between the bid of price, the offer price and the offer quoted by the bond dealer on Wall Street or another financial center.

In reality, when there is a bigger bond dealer spread, there will generally be a greater marketability or liquidity risk associated with the bond issuance. If an investor decides to hold the bond until the maturity date, the marketability or liquidity risk of the bond will be much less than an investor who will only hold the bond on a short-term basis, 

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