Discounting [39]

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Bullet points include: Very difficult to measure price or value that market places on liquidity in isolation Relevant market observables usually depend on other risks that also cannot be observed in isolation, e.g. ‘pure’ credit risk Is the correct model additive or multiplicative? Difference might be >20% of value! Additive or Multiplicative Decomposition of average corporate bond spreads into different elements (average A rated credit spreads) Source: Kemp (2009) , Wilson  (2008) and Barrie & Hibbert Residual spread compensation for liquidity and risks/costs of selling prior to maturity (‘Liquidity Premium’) Additional compensation for unexpected default losses (‘Credit Risk Premium’) Compensation for expected default losses (‘Expected Default Loss’)

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