Maturity length also plays a role, as very short-term bills and very long-term bonds often trade less frequently than intermediate-duration securities. Unlike credit risk, which questions the likelihood of default, liquidity risk questions the ease of transaction.
Understanding Market Depth and Insufficient Orders
Factor Impact on Liquidity Typical Example Credit Rating Lower ratings usually reduce liquidity High-yield or distressed debt Issuer Size Smaller issuers face higher risk Regional bank vs. The resulting illiquidity can force holders of less popular bonds to accept steep discounts to find a buyer.
Most bond trading occurs over-the-counter, rather than on a centralized exchange like stocks. Understanding the Mechanics of Market Depth Market depth refers to the number of buy and sell orders sitting at different price levels in the order book.
Market Depth and the Challenge of Insufficient Orders
The Importance of Pricing Transparency. Bond liquidity risk represents the potential that an investor cannot buy or sell a bond quickly enough to prevent or minimize a loss.
More About Bond liquidity risk
Looking at Bond liquidity risk from another angle can help expand the discussion and give readers a second clear paragraph under the same section.
More perspective on Bond liquidity risk can make the topic easier to follow by connecting earlier points with a few simple takeaways.
