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. The mid price is used as the benchmark. An investor buys at the ask and later sells at the bid with no change in the market. What is the round-trip cost as a percentage of the mid price (to two decimals)?
The round-trip cost is the full bid-ask spread of 0.80 divided by the mid price of 98.80, which equals about 0.81%. Buying at the ask and selling at the bid loses the whole spread, not half of it.
- A0.40%
- B0.81%Correct
- C0.80%
- D1.62%
Explanation
Mid = (98.40+99.20)/2 = 98.80. Bid-ask spread = 0.80. Round-trip cost = 0.80/98.80 = 0.81%. The 0.40% option is the half-spread (one-way cost) divided by 100, and 0.80% divides by face value rather than mid. 1.62% double counts the spread.
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