Bond Terms

Corporate bonds of different maturities often have different liquidity risks. The longer a bond matures, the higher its liquidity risk and the corresponding bond return. In general, shorter-term corporate bonds are more marketable than longer-term bonds, and thus have lower liquidity risks and pay lower returns. While holding bonds before maturity, investors are especially concerned about changes to a bond’s rating and market interest rate that may adversely affect the value of the bonds they hold. The shorter time investors have to hold a bond for, the less chance they will see negative changes during the time and the more willing they will be to purchase the bond.

Interest Rate

Potential change in future market interest rates can affect the liquidity risks of different bonds differently. A change in market interest rates may increase or decrease the value of bonds that investors hold, but to different degrees for bonds having different remaining life to maturity. Interest-rate changes affect bond value the most for bonds of longer remaining terms. For example, a rise in market interest rate decreases the value of long bonds the most, reducing investor demand and causing higher liquidity risk. On the other hand, the increase in market interest rate decreases the value of short bonds the least, attracting more investors and lowering their liquidity risk.

Economic Conditions

References

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