QUICK DEFINITION
Liquidity Premium is additional return demanded by investors for holding an asset that may be harder or more costly to trade.
WHY IT MATTERS
Why Liquidity Premium matters in bond markets
Liquidity premia can widen sharply during stress even when expected credit losses do not change much.
MARKET CONTEXT
How to think about it
Bond investors use liquidity premium as part of a wider framework that links prices, yields, cash flows, liquidity and risk. The concept should therefore be read together with its related terms rather than as an isolated definition.
Is Liquidity Premium important for fixed-income investors?
← Back to the Bond Market Glossary Yes. Liquidity premia can widen sharply during stress even when expected credit losses do not change much.