2.7.1.3. Bid-Ask Spreads Flashcards
What is the bid-ask spread?
The difference between the price at which investors are willing to buy bonds and the price at which they are willing to sell them is called the bid-ask spread.
What is the bid price?
The maximum price a buyer is willing to pay.
What is the ask price?
The minimum price a seller is willing to accept.
What does a dealer who quotes a price of 99 1/8-99 7/8 indicates?
It indicates a willingness to buy at $991.25 and sell at $998.75
What does the spread represents?
The dealer’s profit
What does a bid-ask spread indicates?
The liquidity of a security
A bond that trades at a smaller spread trades more _____
frequently
A bond that trades at a larger spread has less _______
liquidity
If the bid-ask spread of a corporate bond is 98 3/8 – 99 7/8, what is the spread in dollars?
Bid price - 0.98375$1000 = $983.75
Ask price - 0.99875$1000 = $998.75
998.75-983.75 = $15.00
Is Nominal yield the same as interest/coupon rate?
yes
For par bonds, what is the relationship between nominal yield and current yield?
For par bonds, nominal yield and current yield are equal.
If a premium bond is quoted at 102 1/8, what is its market price?
A premium bond quoted at 102 1/8 has a market price of 102 1/8% of $1,000, or 1.02125 x $1,000 = $1,021.25.
If a discount bond is quoted at 96.75, what is its market price?
A discount bond quoted at 96.75 has a market price of 96.75% of $1,000, or 0.9675 x $1,000 = $967.50.
