Explain liquidity, default risk, and maturity risk premiums. What wil

Explain liquidity, default risk, and maturity risk premiums.

What will be an ideal response?

ANSWER

Liquidity problems exist in thinly traded bonds, default risk is the likelihood the corporation will default on its bond obligations, and the maturity risk reflects the fact that longer-term bonds possess greater interest rate risk and sensitivity than shorter term bonds. If any of these exists, investors will demand compensation for the risk by demanding a yield premium to own the bonds.