Bond Duration and Convexity Simplified – Part 1 of...While analyzing bonds, it is important to apply the concepts of duration and convexity. Duration has...
Lessons
- Common Options Embedded in a Bond Issue
- General Characteristics of Bonds
- Accrued Interest, Clean Price, and Dirty Price
- Bond Spreads
- Bid-Ask Spread of Bonds
- Impact of Liquidity on Bond Spreads
- Treasury STRIPS
- Floating Rate Notes
- Inflation-Indexed Bonds
- How to Read Bond Tables?
- How to Read Bond Quotes?
- “Pull to Par” of Bond Prices
Impact of Liquidity on Bond Spreads
The various bonds trading in the market can have different liquidity. A highly liquid bond will trade very frequently, in large volumes, and will have a very low bid-ask spread. On the other hand a less liquid bond will trade less frequently and will have higher bid-ask spread.
The liquid Treasury notes/securities are called "On-the-run" securities, while the illiquid securities are called "Off-the-run" securities.
The yield of "off-the-run" securities will be higher than the "on-the-run" securities even if they have the same characteristics such as maturity and credit rating. The additional yield is the risk premium attributed to the liquidity risk present in the "off-the-run" securities.
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