CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

The yield on a default-free bond is composed of ______.

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.
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