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The objective of this research is to study the relationship between various aspects of corporate bonds liquidity , transaction costs and trading activity, and their perceived credit quality as measured by credit ratings. For debt securities, Credit quality and liquidity are perhaps the most important factors that affect the investors' decisions whether to trade or hold these assets on their portfolio, as several theoretical and empirical studies identify these factors as key components of bonds yield spreads. However, the interaction and relationship between these two characteristics is not sufficiently addressed in the literature. From the investors' perspective, it is beneficial to know whether they face a tradeoff between credit quality and liquidity or if both desirable features move in the same direction. We use more than twelve years of Enhanced TRACE data from 2002 to 2014 to analyze the liquidity of corporate bonds both cross-sectionally across credit ratings and intertemporally around credit rating changes. The first manuscript studies the relationship between corporate bonds' credit risk and their market liquidity, and the dynamics of this relationship over the period from 2002 to 2014. Unlike the implication of theoretical models, our findings do not empirically support a monotonically positive relation between credit risk and transaction costs. Instead, we find an inverted U-shaped relationship where bonds with ratings near the Investment grade/ High yield boundary have the largest transaction costs (lowest liquidity) after controlling for other relevant factors. One explanation for this finding is that bond dealers behave more as brokers in speculative grade bonds and are reluctant to enter overnight positions in these risky securities, unless they find vi PREFACE This dissertation is prepared using a manuscript format. vii