Liquidity Premium
- A liquidity premium is an extra cost of a liability based on how it is viewed. Some liabilities are cash, while others are less liquid and must be converted to cash through sales where demand is a factor. Liabilities that involve cash directly are worth more in the eye of the market, even if a cash liability and a nonliquid liability are for the same amount. The extra cost of a cash liability is known as a liquidity premium. The first method of contingent liability valuation is calculating this liquidity premium.