 Compute the bid-asked spread for the following bond: Dealer Bid Asked 1 100 1/32 100 5/32 2 100 4/32 100 6/32 3 100 2/32 100 5/32 Answer is .03125 (100 5/32) - (100 4/32) = 1/32 = .03125 Can anybody explain this to me? Why it was done this way

Remeber the topic about the secondary market of the bond? The T-Bond & Notes are quated in this way (percent & 32nds of 1%) in the seconday market. WHAT IS THE ESSENCE OF THIS? Remeber the liquidity risK? The wider the spread of Bid & Ask -> The less the lequidity of the security-> tend to dicrease the price of the security & the investor or the holder will require a higher yield. Therefore, the bid&ask spread is the measure of liquidity of a security -> the less the spread the more liquid the security & the widder the spread the less liquid the security. And for the case in measuring the liquidity of the T-Bonds & Notes, they are measured in terms of the Bid&Ask spread of “1xx% of xx/32”. Hope it will help! That was totally non-responsive… You would buy from dealer 1 or 3 and sell to dealer 2. Thus, the market bid/ask is 1/32.

"That was totally non-responsive… " I don’t get?

The question asked for the bid/ask spread, not some core dump about liquidity (not relevant to the question), T-Bonds and Notes (not mentioned explicitly in the question), the relationship between liquidity and spread (not mentioned in the question), the relationship between liquidity and price (not mentioned in the question). The question did ask why the spread was 1/32 and you didn’t answer it. When you get to LIII and start writing essay questions, the above answer is the kind that takes a long time and gets a 0.