Which of the Following Statements Describes a Liquidity Premium

question 51

Multiple Choice

Which of the following statements describes a liquidity premium?

• A)It is a premium added by investors to the real risk-free rate of return to account for inflation that is expected to exist during the life of an investment.
• B)It is a premium that denotes the difference between the interest rate on a U.S. Treasury bond and a corporate bond of equal maturity and marketability.
• C)It is a premium that investors add to account for the risk of fluctuations in the interest rate of an investment.
• D)It is a premium investors add to the real risk-free rate of return to account for the risk of longer maturity bonds having greater default risks.
• E)It is a premium that is added to the rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost.

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Definitions:

Market Price

The present rate at which a service or asset is available for sale or purchase in the open market.

Equilibrium Level

The state at which market supply and demand balance each other, resulting in stable prices and quantities.

Surplus

The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.

Equilibrium Level

The state of balance where market forces such as supply and demand are equal, often used in the context of prices and quantities in markets.