hard · Market Microstructure
A dealer in the over-the-counter bond market quotes a wider spread for a thinly-traded corporate bond than for an on-the-run Treasury note.
Which microstructure factor primarily explains this difference?
- Federal regulations that mandate minimum spreads for investment-grade debt.
- Higher exchange fees for corporate bonds compared to Treasuries.
- The lower par value of corporate bonds relative to Treasury notes.
- Increased inventory holding risk due to longer expected time to find a counterparty.
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