Liquidity risk, Financial Management

An investor, who wants to sell a bond even before it reaches its maturity date, would be concerned as to whether he will receive a price that is close to the true value of the issue. True value is indicated by a recent transaction. For example, let us consider that an investor wants to sell bond X; of late, the issue has been trading between Rs.100 and Rs.101. (A selling price between Rs.100 and Rs.101 is considered as the true value of the issue). The investor would expect to sell the bond somewhere between these prices. If the market conditions change, there is always a risk that the investor will not be able to sell at this price. The risk that the investor will have to sell a bond below its true value is referred to as liquidity risk. Liquidity can be measured as the size of the spread between the bid price and the ask price. A narrow bid-ask spread results in a lower liquidity risk while a wider bid-ask spread results in a greater liquidity risk.

Posted Date: 9/10/2012 1:24:42 AM | Location : United States







Related Discussions:- Liquidity risk, Assignment Help, Ask Question on Liquidity risk, Get Answer, Expert's Help, Liquidity risk Discussions

Write discussion on Liquidity risk
Your posts are moderated
Related Questions
Explain the Types of Debt Securities There are many types of debt securities available in market.  The range includes Government Securities, Deep discount bonds, Deben

Q. What do you mean by Time value of money ? The concept of TVM refers to the fact that the money received today is different in its worth from the money receivable at some oth

evaluate the importace of leverage in financial management of a small scale company

In how many area ratios are grouped Ratios can be grouped into 3 main areas: 1 Performance - how well business has done (profitability) 2 Position - short term standing

Degree of Operating Leverage A measure of the firm's operating leverage, which is calculated as the contribution margin distributed by income before taxes. A rigid with a high

Commercial Paper (CP) is a short-term unsecured promissory note issued in the open market. It also represents the obligation of the issuer. Normally, it is issued

Capital cost of product a is ? 5 crores and initial capital cost of product b is ? 3 crores. Life of product a is 30 years and life of product b is 10 years . The difference in ini

Illustration  An investor with a 1-year investment horizon purchases a 20-year 5% corporate bond. The prevailing price of the bond is Rs.82.3488 for a yield of 6.2%

An analyst should first examine the issuers debt structure in order to analyze the tax-backed debts. The debt burden consists of respective direct a

The managing directors of three profitable listed companies discussed their companies' dividend policies at a business lunch. Company A ; has deliberately paid no dividends for