If investors are uncertain that they will be able to sell a corporate bond quickly, the investors will demand a higher yield in the form of a(n) _________________.

Question

Quizplus · Accepted Answer

The correct answer is D) Liquidity risk premium. This is because when investors are uncertain about their ability to quickly sell a corporate bond (or any asset), they perceive it as less liquid. To compensate for this liquidity risk—the risk that they may not be able to sell the asset quickly without a significant price concession—they demand a higher yield, which is referred to as a liquidity risk premium.

If Investors Are Uncertain That They Will Be Able to Sell