Examine the securities below and identify the security with the highes

Examine the securities below and identify the security with the highest liquidity premium, the highest default
risk premium, and the highest maturity premium.

a. 30-year U.S. Government Treasury bond maturing in 2025
b. 25-year Bbb-rated corporate bond maturing in 2030, actively traded on the New York Exchange
c. 10-year Aaa-rated corporate bond maturing in 2020, thinly traded on a regional exchange
d. 3-month U.S. Treasury bill

ANSWER

The 10-year Aaa-rated corporate bond has the highest liquidity premium because it is not actively traded and may be
difficult to turn into cash on short notice. The Bbb-rated corporate bond has the highest default risk premium. The U.S.
Government securities are virtually default risk free, and the other corporate bond is Aaa rated. The 25-year Bbb-rated
corporate bond maturing in 2030 has the highest maturity premium. Although the Treasury bond had a longer
maturity when issued, currently the 25-year Bbb bond has the longest time left to maturity.