Which of the following statements describes a liquidity premium?
A)It is a premium added by investors to the real risk-free rate of return to account for inflation that is expected to exist during the life of an investment.
B)It is a premium that denotes the difference between the interest rate on a U.S. Treasury bond and a corporate bond of equal maturity and marketability.
C)It is a premium that investors add to account for the risk of fluctuations in the interest rate of an investment.
D)It is a premium investors add to the real risk-free rate of return to account for the risk of longer maturity bonds having greater default risks.
E)It is a premium that is added to the rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost.

Question

Quizplus · Accepted Answer

A liquidity premium is a premium that is added to the rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost. This is because investors demand a higher return to compensate for the risk of potentially being unable to sell the security quickly and easily if needed.

Which of the Following Statements Describes a Liquidity Premium