- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 14. Credit Risk
- Subject 3. Factors Impacting Yield Spreads
CFA Practice Question
The yield on a default-free bond is composed of ______.
II. expected inflation rate
III. maturity premium
IV. liquidity premium
V. credit spread
I. risk-free interest rate
II. expected inflation rate
III. maturity premium
IV. liquidity premium
V. credit spread
Correct Answer: I, II and III
Liquidity premium (IV) + credit spread (V) is the yield spread.
User Contributed Comments 3
| User | Comment |
|---|---|
| CJPerugini | Why wouldn't you include liquidity premium? Just because a bond is default free doesn't mean it's 100% liquid. |
| ascruggs92 | Actually, it does. Think about it logically, there will always be buyers for a risk free asset, and no seller would reduce the price of a risk free asset unless the sale was forced, that would be giving away guaranteed income. Also, understand that any time risk free anything is being discussed, it is always in reference to US Treasuries, and there is no shortage of liquidity in that market. |
| houstcarr | there is major shortage of liquidity in plenty of us treasuries. this has been a major discussion in markets for the past few years. |