- CFA Exams
- CFA Exam: Level I 2021
- Study Session 15. Fixed Income (2)
- Reading 46. Understanding Fixed-Income Risk and Return
- Subject 8. Credit and Liquidity Risk
CFA Practice Question
The spread between on-the-run and off-the-run securities is due to ______.
B. coupon rate
C. liquidity
D. duration
A. maturity
B. coupon rate
C. liquidity
D. duration
Correct Answer: C
User Contributed Comments 10
| User | Comment |
|---|---|
| mrushdi | pls explain, how if security from same company. |
| cong | It is more difficult to sell off-the-run, I guess. |
| emporium | yeah. on the run is more liquid |
| Oarona | mrushdi:On-the-run securities are less liquid than off-the-run securities. lower liquidity leads to less demand and therefore a low price. This results in high yield.On the other hand, off the run securities are more liquid leading to A HIGHER demand. the higher demand results in higher price resulting in lower yield. |
| thekid | Oarona: On-the-run is MORE LIQUID than off-the-run securities. |
| jpducros | Agree with thekid |
| jonan203 | man, not to call people out but it seems the same people consistently give misinformation out in the comments or the particular reason as to how they derived that A,B,C or D is the correct answer. |
| johntan1979 | jonan203, if I facepalmed each time that happened, I would have a permanent mark on my forehead. |
| GBolt93 | shouldn't there not be a premium since you could arbitrage two securities with identical time to maturity, coupon rates, and credit risk if one had a premium due to liquidity? |
| houstcarr | one, they don't have identical time to maturity, since the OTR is the most recent issued, so there is a difference. two, arbitrage only works if the spread will reverse. the spread isn't going to reverse if the liquidity premium doesn't reverse |