Question-36: What is the liquidity risk?

Answer: Liquidity risk is the risk that as an investor you will have to sell a bond below its true value.

Question-37: How can you measure the liquidity risk?

Answer: The primary measure of liquidity is the size of the spread between the bid price and the ask price quoted by a dealer. The wider the bid/ask spread, the greater is the liquidity risk.

Question-38: what do you mean by a liquid market?

Answer:  Generally, a liquid market, can be defined by “small bid/ask spreads which do not materially increase for large transactions.” How to define the bid/ask spread in a multiple-dealer market is subject to interpretation. For example, consider the bid/ask spread for four dealers.

Question-39: How bid/ask spread is measured for a bond?

Answer: The bid/ask spread can be computed by looking at the best bid/high price for buy and the lowest ask/sell price. This liquidity measure is called the market bid/ask spread.

Question-40: What does it mean to marking a position to market?

Answer: By marking a position by a trader/investor to market, it is meant that the security is revalued in the portfolio based on its current market price.