CFA Level I · CFA Level I Exam · Fixed-Income Issuance and Trading
A dealer quotes a corporate bond at a bid price of 98.40 and an ask price of 98.70 per 100 of par. An investor buys bonds with a par value of 2,000,000 and immediately sells them back to the same dealer. The investor's round-trip transaction cost from the bid-ask spread is closest to:
The round-trip cost is about 6,000. The investor pays the ask of 98.70 and receives the bid of 98.40, a loss of 0.30 per 100 of par. Applied to 2,000,000 of par, that is 0.30% of par, or 6,000.
- A3,000
- B6,000Correct
- C12,000
Explanation
The investor buys at the ask of 98.70 and sells at the bid of 98.40, so the loss is 0.30 per 100 of par. On 2,000,000 par this is 0.30% x 2,000,000 = 6,000. 3,000 uses half the spread, and 12,000 applies the spread to the wrong base.
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