Which type of risk arises from the difficulty in selling a bond without incurring a loss?

The correct answer is liquidity risk, which refers to the potential difficulty in selling a bond or other financial asset without significantly affecting its price. When a bond has low liquidity, it means that there are not many buyers or sellers in the market, leading to potential losses if the holder needs to sell the bond quickly. This risk is particularly pertinent for bonds that may not be frequently traded or are not widely held by investors.

In a market scenario, if investors want to sell a bond and there are few interested buyers, they may have to sell at a lower price than expected, resulting in a financial loss. Understanding liquidity risk is crucial for investors as it impacts their ability to access cash when needed and the overall valuation of their investment portfolio.

Meanwhile, reinvestment risk concerns the possibility that cash flows received from an investment may need to be reinvested at lower interest rates, potentially leading to reduced returns over time. Inflation risk is the danger that the purchasing power of returns may diminish due to rising prices in the economy. Exchange rate risk involves fluctuations in currency values, which can affect the returns on investments denominated in foreign currencies. Each of these risks plays a different role in the financial markets, but none directly pertains to the challenge of selling a bond quickly