Liquidity is an economic term that describes the ability of assets to be bought or sold promptly and without loss in value at a price close to the market price. In transactions, the degree of liquidity of a financial asset is an important criterion in determining its price.
The Liquidity of bonds is a relative concept and has no common established practice. The following parameters shall be taken into account to assess liquidity:
1) Bond turnover. The number of bond transactions conducted daily is one of the main parameters of liquidity.
2) Issuers business area. Trade in bonds of companies from different business areas may differ due to different market factors.
3) Credit rating of the issuer/bonds. The number of transactions on issues with credit rating close to junk rating may significantly differ from the number of transactions on issues with high rating.
4) Volatility. Increased volatility may also have a positive impact on the bond turnover and liquidity.
5) Issue amount. The larger the issue amount, the more likely it is that the assets will be sold through exchange trading.
6) Equity market conditionEuphoria, panic and crises force investors to review their portfolios, thus increasing the number of transactions on the market.
7) Embedded options in bonds. Convertibility, put/call offers and other options may also affect the bond liquidity.
The above list of parameters determining bond liquidity is not final and may be much larger. It depends on which market and securities of which issuer the investor is trading in.