Liquidity Premium

AAA

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 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 TERMS
  1. Yield

    The income return on an investment. This refers to the interest ...
  2. Illiquid

    The state of a security or other asset that cannot easily be ...
  3. Liquidity

    1. The degree to which an asset or security can be bought or ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Premium

    1. The total cost of an option. 2. The difference between the ...
  6. Liquid Asset

    An asset that can be converted into cash quickly and with minimal ...
Related Articles
  1. Playing The Gap
    Forex Education

    Playing The Gap

  2. How do I measure option liquidity?
    Options & Futures

    How do I measure option liquidity?

  3. Liquidity Measurement Ratios
    Markets

    Liquidity Measurement Ratios

  4. What You Need To Know About Preferred ...
    Trading Strategies

    What You Need To Know About Preferred ...

comments powered by Disqus
Hot Definitions
  1. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  2. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  3. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  4. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  5. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  6. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
Trading Center