liquidity premium


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Liquidity premium

Liquidity Premium

The rate of return that an investor expects above other rates or return in order to make an illiquid investment. All other things being equal, an investor generally expects a higher return for investing in something that may be difficult to convert to cash. For example, an inactive bond may pay a higher coupon rate than an active bond with a similar credit rating.

liquidity premium

The extra return demanded by investors as compensation for holding assets that may be difficult to convert into cash. For example, bonds that seldom trade should offer a higher yield to maturity compared to actively traded bonds of similar maturity and credit risk.
References in periodicals archive ?
As one can see from Table 3, the relationship between desired (or preexisting) equity holdings, and the demanded liquidity premium resembles an inverted parabola, and is zero at both ends.
It is possible to use the liquidity-premium spread to adjust the breakeven inflation compensation for movements in the liquidity premium.
Vila (1999): "Equilibrium interest rates and liquidity premium with transaction costs", Economic Theory, 13, pp.
Our interpretation of this evidence is that as the liquidity premium in expected returns decreases, there is an increase in investment opportunities at the margin, and the set of viable investment opportunities expands.
Failure to adjust for a liquidity premium would represent a major flaw in an appraisal report on a company without equity and that is actively traded in the market.
In practice, he set the liquidity premium equal to 60 basis points, which was the average spread between the short-term market rate and a 10-year government bond rate.
However, we interpret univariate tests and visual evidence with caution, because other factors could offset an increase in the liquidity premium that occurs between the two periods.
Chapter 7 Unlocking the liquidity premium in collateral swaps
Investors can take advantage of situations where a security's liquidity premium or discount runs counter to their assessment of the underlying value.
A well-known principle of finance is that today's long rates are just expected future short rates plus a liquidity premium.
A 15% drop in liquidity, for example, would mean a relatively minor increase of five basis points in the liquidity premium on AAA-rated bonds, but a 116-basis-point jump in the premium for high-yield bonds.