I am confused about these two q:
#2 I would choose portfolio 2 as enhanced indexing portfolio because there is a difference in key rate duration. portfolio 3 does not. How is portfolio 2 is pure indexing?
# 3 I do not understand the sentence- liquidity increases YTM of a bond???
Could anyone clarify this for me? I appreciate any help.
This is from the CFA Online Quiz? Don’t have access to it.
Did you copy the full sentence from the explanation? I would say that:
Moynahan titles page 3, “Liquidity in the Fixed-Income Market.” He wants to ensure that the class appreciates the differences in liquidity between fixed-income and equity securities. He stresses that liquidity across fixed-income securities varies greatly and that compared to equities, fixed-income markets are generally less liquid. Also, liquidity influences fixed-income pricing, but illiquidity enhances the portfolio’s yield to maturity. Lastly, dealers will narrow bid–ask spreads on thinly traded securities as a consequence of their illiquidity.
Illiquid bonds are harder to dispose of once purchased, therefore investors require a higher yield on bonds that are illiquid (i.e. higher liquidity premium). And liquidity premium is part of the YTM.