Liquidity Premium Calculator

Calculate Liquidity Premium (LP)





Formula

The formula to calculate the Liquidity Premium (LP) is:

\[ LP = AR - \left(RFR + \left(MR - RFR\right)\right) \]

Where:

What is a Liquidity Premium?

A liquidity premium is the additional return that investors demand for holding an asset that is not easily converted to cash without a significant loss in value. Assets that are less liquid, like real estate or certain bonds, tend to have a higher liquidity premium compared to more liquid assets like stocks or government bonds.

Example Calculation

Let's assume the following values:

Using the formula to calculate Liquidity Premium:

\[ LP = 8 - \left(2 + (6 - 2)\right) = 8 - 6 = 2\% \]

The Liquidity Premium is 2%.