Liquidity premium

Liquidity premium

Liquidity premium is a term used to explain a difference between two types of financial securities (e.g. stocks), that have all the same qualities except liquidity. For example:

Liquidity premium is a segment of a three-part theory that works to explain the behavior of yield curves for interest rates. The upwards-curving component of the interest yield can be explained by the liquidity premium. The reason behind this is that short term securities are less risky compared to long term rates due to the different of maturity dates. Therefore investors expect a premium, or risk premium for investing in the risky security.

or

Assets that are traded on an organized market are more liquid. Financial disclosure requirements are more stringent for quoted companies. For a given economic result, organized liquidity and transparency make the value of quoted share higher than the market value of an unquoted share. The difference in the prices of two assets, which are similar in all aspects except liquidity, is called the liquidity premium.


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  • Liquidity Premium — A premium that investors will demand when any given security can not be easily converted into cash, and converted at the fair market value. When the liquidity premium is high, then the asset is said to be illiquid, which will cause prices to fall …   Investment dictionary

  • liquidity premium — (1) The portion of a security s yield that is attributable to investors desire to hold liquidity. (2) The difference or spread paid for liquidity. American Banker Glossary forward rate minus expected future short term interest rate. Bloomberg… …   Financial and business terms

  • Liquidity premium — Forward rate minus expected future short term interest rate. The New York Times Financial Glossary …   Financial and business terms

  • liquidity premium — The relative advantage of holding assets in liquid form. Investors are prepared to receive lower returns on liquid assets, because they can easily be transferred into cash with little capital loss. Liquid assets are thus to some extent a hedge… …   Accounting dictionary

  • liquidity premium — The relative advantage of holding assets in liquid form. Investors are prepared to receive lower returns on liquid assets, because they can easily be transferred into cash with little capital loss. Liquid assets are thus to some extent a hedge… …   Big dictionary of business and management

  • Liquidity theory of the term structure — A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market s expectations of future interest rates because they embody a liquidity premium. The New York Times Financial Glossary …   Financial and business terms

  • liquidity theory of the term structure — A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market s expectations of future interest rates because they embody a liquidity premium. Bloomberg Financial Dictionary …   Financial and business terms

  • liquidity preference — (in Keynesian economics) the degree of individual preference for cash over less liquid assets. [1935 40] * * * In economics, the premium that holders of wealth demand for exchanging ready money or bank deposits for safe, nonliquid assets such as… …   Universalium

  • Liquidity Preference Theory — The idea that investors demand a premium for securities with longer maturities, which entail greater risk, because they would prefer to hold cash, which entails less risk. The more liquid an investment, the easier it is to sell quickly for its… …   Investment dictionary

  • Property Premium — is the key concept in the system of property based economics developed by Gunnar Heinsohn and Otto Steiger, together with Hans Joachim Stadermann. It is an insight derived from the legal distinction between property and possession, which although …   Wikipedia

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