Examine the securities below and identify the security with the highest liquidity premium, the highest default
risk premium, and the highest maturity premium.
a. 30-year U.S. Government Treasury bond maturing in 2025
b. 25-year Bbb-rated corporate bond maturing in 2030, actively traded on the New York Exchange
c. 10-year Aaa-rated corporate bond maturing in 2020, thinly traded on a regional exchange
d. 3-month U.S. Treasury bill
The 10-year Aaa-rated corporate bond has the highest liquidity premium because it is not actively traded and may be
difficult to turn into cash on short notice. The Bbb-rated corporate bond has the highest default risk premium. The U.S.
Government securities are virtually default risk free, and the other corporate bond is Aaa rated. The 25-year Bbb-rated
corporate bond maturing in 2030 has the highest maturity premium. Although the Treasury bond had a longer
maturity when issued, currently the 25-year Bbb bond has the longest time left to maturity.
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