FRM Part I · FRM Exam Part I · Corporate Bonds
A dealer quotes a corporate bond at a bid of 98.40 and an ask of 99.20 per 100 face value. An investor buys USD 5 million face and immediately sells it back to the same dealer, with no change in quotes. What is the investor's round-trip transaction cost in USD?
The round-trip cost is USD 40,000. The investor buys at 99.20 and sells at 98.40, losing 0.80 per 100 of face value. Applied to USD 5 million of face value, that is 0.80 percent, or USD 40,000.
- AUSD 20,000
- BUSD 40,000Correct
- CUSD 80,000
- DUSD 4,000
Explanation
The spread is 99.20 - 98.40 = 0.80 per 100. On USD 5,000,000 face, the cost is 0.80% x 5,000,000 = USD 40,000. USD 20,000 is the half-spread error, and USD 80,000 wrongly doubles the spread.
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