Series 7: 2.7.3. Bid-Ask Spreads

2.7.3. Bid-Ask Spreads

The difference between the price at which investors are willing to buy bonds and the price at which investors are willing to sell them is called the bid-ask spread. The bid price is the maximum price a buyer is willing to pay, and the ask price is the minimum price a seller is willing to accept. A dealer who quotes a price of 99 1/8 – 99 7/8 is indicating a willingness to buy at $991.25 and sell at $998.75. The spread represents the dealer’s profit. The bid-ask spread is a key indicator of the liquidity of a security. A bond that trades at a smaller spread is generally one that trades more frequently (it is more liquid) than one that has a l