What is Liquidity Risk?

Liquidity risk is the risk that a bond is sold below its true value, example, at a price that is lower than the prices of recent trade in bonds of the same maturity/duration (which is the same as selling the bond at a rate which is higher than recent trades in the relevant bond or similar bonds).

This may happen if the bond market happens to be less liquid at the time of selling. The most accepted measure of liquidity risk is the spread between buy and sell rates. The wider the spread, the higher the liquidity risk