- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 14. Credit Risk
- Subject 1. Sources of Credit Risk
CFA Practice Question
The causes of changes in liquidity risk are as a result of ______.
B. the inability of dealers to make a market when a new structure is in its infancy
C. the changes that occur in bid-ask spreads when the market expands or contracts
D. unappealing bond structures which cause illiquid markets
A. the new complex bond structures that arise from time to time
B. the inability of dealers to make a market when a new structure is in its infancy
C. the changes that occur in bid-ask spreads when the market expands or contracts
D. unappealing bond structures which cause illiquid markets
Correct Answer: C
User Contributed Comments 2
| User | Comment |
|---|---|
| tagr | Market expands => more liquidity => more competition among market participants => tighter bid-ask spreads |
| octavianus | B is not true. The question refers to CHANGES in liquidity risk, and if do not make a market when a new structure is in its infancy, there is no CHANGE in liquidity for the security because liquidity does not exist at that point in time |