The Bid–Ask Spread: AN ERROR IN THE HANDOUT?

SUMORO
Posts: 1
Joined: Thu Apr 19, 2012 9:16 pm

The Bid–Ask Spread: AN ERROR IN THE HANDOUT?

Postby SUMORO » Thu Apr 19, 2012 9:20 pm

HI This is an extract from the note on Bond valuation (PRM I, Financial instrument)

The Bid–Ask Spread: every traded bond has a bid as well as an ask quoted price. The bid price is
the price at which an investor can sell a bond, whereas the ask price is the price at which he can
buy it.

It seems BID and ASk definition is wrong, can you please advise me

Assefa

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: The Bid–Ask Spread: AN ERROR IN THE HANDOUT?

Postby content.pristine » Sun Apr 22, 2012 12:08 am

Hi Sumaro,

Thanks for your question.
Technically, what was given is correct.

"The Bid–Ask Spread: every traded bond has a bid as well as an ask quoted price. The bid price is the price at which an investor can sell a bond, whereas the ask price is the price at which he can buy it."

See, if you would like to buy a bond, you would quote a bid price and put it in the system. However, you don't know if that price would ever get executed. It may just stand on the system all day in case the market is going up. If you would like to buy it, and you want the trade to execute immediately, you HAVE TO match the lowest offer/ask price. Thus, the bid price is the price at which one WOULD LIKE to BUY it, however the bid price is also the price at which someone can surely SELL a bond. Basically, just because you put a bid or offer order does not mean it would be executed. You would need to match the other side in order to ensure your order is executed.

This explanation is not really important for your exam. You just need to know that Bid is the rate that people WOULD LIKE to buy something and ask/offer is that price which people WOULD LIKE to sell.

Hope this helps 8-)


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