CFA Practice Question

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CFA Practice Question

The causes of changes in liquidity risk are as a result of ______.

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
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