Question

1. The risk of being unable to sell a bond prior to the maturity date without having to accept a significant discount to market value best describes:

1. credit risk.
2. liquidity risk.
3. interest rate risk.

Answer 1

A) Credit risk the risk that the issuer will default on coupon or maturity value payment so this is not correct

C) Interest rate risk is the risk that the market interest rate will increase and the price of the bond will decrease as they are inversely related. So this is not the correct option

B) Liquidity implies that the bond doe not have enough buyers and it is difficult to sell it until and unless the price is lowered drastically which is said to be the liquidity discount. Therefore this is the correct option.