The correct answer is: C. less frequently traded
A liquidity premium is a premium that investors demand for holding assets that can be easily sold. Bonds with high liquidity premiums are less frequently traded because investors are willing to pay a higher price for them in order to be able to sell them quickly if they need to.
Option A is incorrect because inflated trading would mean that the price of the bonds is higher than it should be, which is not the case for bonds with high liquidity premiums.
Option B is incorrect because default free trading would mean that there is no risk of the bond issuer defaulting on the bond, which is also not the case for bonds with high liquidity premiums.
Option D is incorrect because bonds with high liquidity premiums are less frequently traded, not more frequently traded.