Liquidity Premium

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Dictionary Says

Definition of 'Liquidity Premium'

A premium that investors will demand when any given security can not be easily converted into cash, and converted at the fair market value. When the liquidity premium is high, then the asset is said to be illiquid, which will cause prices to fall, and interest rates to rise.
Investopedia Says

Investopedia explains 'Liquidity Premium'

For example, assume an investor is looking at purchasing one of two corporate bonds, each with the same coupon payments, and time to maturity. Assuming one of these bonds is traded on a public exchange, while the other is not, the investor will not be willing to pay as much for the non-public bond. The difference in prices, and yields, the investor is willing to pay for each bond is called the liquidity premium.

Related Definitions

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    Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally regarded in the same light as cash because their prices are ...
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  • Liquidity

    1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. ...
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  • Illiquid

    The state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets also cannot be sold quickly because of a lack ...
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    • Premium

      1. The total cost of an option. 2. The difference between the higher price paid for a fixed-income security and the security's face amount at issue.3. The specified amount of payment ...
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    • Yield

      The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, ...
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    • Bond

      A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used ...
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