Bonds with higher liquidity must offer higher interest rates in the market, because such investments can be easily converted into cash on short notice at or near the amounts originally invested.

Question

Quizplus · Accepted Answer

Bonds with higher liquidity are easier to buy and sell, which means they are less risky and therefore offer lower interest rates. Bonds with lower liquidity, on the other hand, are harder to buy and sell and thus riskier, which means they offer higher interest rates to compensate for the added risk.

Bonds with Higher Liquidity Must Offer Higher Interest Rates in the Market