Which of the following statements is true?
A) A liquid asset is one that can be quickly and cheaply converted into cash.
B) The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds.
C) The differences in bond interest rates reflect differences in default risk only.
D) The corporate bond market is the most liquid bond market.

Question

Quizplus · Accepted Answer

A liquid asset is one that can be easily converted into cash without affecting its market value, and it typically includes assets such as stocks, some types of bonds, and cash equivalents. This statement correctly defines a liquid asset.

B) The statement is incorrect because the demand for a bond does not necessarily decline when it becomes less liquid. Instead, as the liquidity of a bond decreases, its market price would typically decline while its yield (interest rate) would increase.

C) The statement is incorrect because the differences in bond interest rates reflect various factors such as default risk, inflation expectations, supply and demand, and other market conditions.

D) The statement is incorrect because the Treasury bond market is generally considered the most liquid bond market, followed by the market for agency bonds issued by government-sponsored enterprises.

Which of the Following Statements Is True