What is Liquidity in a Bond and is it Important for your bond investment?
 

Think of liquidity when you are looking to sell your old car and buy a new one. If your old car is a Maruti, you will be able to sell the car quickly and get a good market price, as Maruti cars are highly “liquid” in the second-hand market. Cars of other makes are not as easy to sell as Maruti cars and they are termed as less liquid.

  Arjun Parthasarathy

SEARCH FOR YIELDS Issue 6, November 13th

Which is the easiest car to sell?

Think of liquidity when you are looking to sell your old car and buy a new one. If your old car is a Maruti, you will be able to sell the car quickly and get a good market price, as Maruti cars are highly �liquid� in the second hand market. Cars of other makes are not as easy to sell as Maruti cars and they are termed as less liquid.

Similar is the case with bonds, some bonds are easy to sell and some are not easy to sell. Various factors including safety and ownership determine the liquidity of a bond.

Does liquidity matter for your bond investments?

If you� are planning to invest in a bond and hold the bond to maturity, which is the time that you get back your principle invested in the bond, liquidity should ideally not matter to you. However, in case you need funds for emergency or you find some other lucrative investment opportunity, you will find it easier to sell liquid bonds, If a bond is not very liquid, you may not get the right price when you go to sell the bond.

Should you invest in liquid or less liquid bonds?

Typically, liquid bonds will offer lower interest rates than less liquid bonds. However, in terms of returns, liquid bonds can give you far higher returns than less liquid bonds when interest rates fall and when interest rates are stable, less liquid bonds can give higher returns than liquid bonds.

Check with your bond advisor on the right bonds to buy for liquidity and returns.��


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