How can a bond have both credit risk and liquidity risk?

Keep the issuer ledger separate from the resale ledger

The issuer ledger lists promised coupons, principal, due dates and actual payments. The resale ledger records the time, quantity and terms of an available market quote or transaction. These records answer different questions. A scheduled principal amount is not a standing offer from another investor to buy the bond at that amount today.

Investor.gov describes default and liquidity risks among the risks of bonds. The following original examples isolate those two ideas. They do not assign a probability to default, estimate a fair spread or compare real issuers. All amounts and outcomes below are invented.

An invented payment schedule is not a guarantee

Suppose a fictional one-year bond promises a $60 final coupon plus $1,000 principal. In Scenario A, $1,060 arrives on the scheduled date. In Scenario B, the same amount arrives later. In Scenario C, stipulate that only $600 is eventually recovered after a default. These are alternative teaching cases, not observed outcomes or forecasts.

For each case, record both amount and timing. Treating late money as though it arrived on time hides part of the difference. The $600 recovery is an arbitrary scenario input, not a typical recovery estimate. The contract’s seniority, collateral and actual restructuring terms would matter in a real assessment.

A resale need introduces a different question

Now set aside default and imagine the holder needs to sell before the payment date. Suppose a hypothetical buyer quotes $930 for the intended quantity, while a displayed reference price says $980. The holder cannot conclude that $980 is executable merely because it appears on a screen. Record whether either figure is a current firm quote, an indication or an earlier trade.

The $50 difference between the two invented figures does not automatically measure liquidity risk by itself. The prices may reflect different times, quantities, information or quote conventions. This exercise calls for investigating those distinctions, rather than labeling every price decline a default signal or every unchanged reference mark evidence of easy sale.

Build a two-column evidence review

For payment risk, identify the obligor, payment terms, security and evidence about financial capacity. For resale risk, identify market access, quote freshness, trade size and any restrictions. Keep a rating or a descriptive risk label as one piece of evidence, not a substitute for reading the actual obligation and the terms of the market transaction.

Then ask what remains unknown in each column. You may understand the promised payments but lack reliable evidence of a resale price for your size. Or a market may be active while the issuer’s future payment capacity remains uncertain. Combining the columns into a single safe or unsafe label would conceal the actual unresolved questions.

Method, sources, and limits

The ledgers and scenarios are original educational examples, checked against primary SEC investor material on 26 October 2026. No live quote, issuer rating, recovery rate or bond recommendation is supplied. Payment seniority, insolvency treatment and investor protections depend on the particular contract and jurisdiction, which this worksheet does not determine.