A. Explain the difference between a bid price and an asked price and also explai

Question

A. Explain the difference between a bid price and an asked price and also explain why the prices are different.

Maturity: 8/15/2019, Coupon:  8.250, Bid: 142:10, Asked: 142:15, Chg: +52, Asked Yield:  3.393.

Maturity:  2/15/2020, Coupon:  8.620, Bid: 146:15, Asked: 146:19, Chg: +54, Asked Yield:  3.473.

Do the following for the 2020 bond:

B. Calculate the actual (in dollars) bid and ask prices for this bond.

C. Calculate the bid ask spread.

D. What was the price of the bond from the previous day?

E. How much is the coupon payments of this bond?

F. You purchase a bond with an invoice price of $1,500. The bond has a coupon rate of 8.5 percent, semi-annual coupons, and there are four months to the next coupon date. What is the clean price of the bond?

Explanation / Answer

A: If you've ever traded in a car at car dealership, you understand the difference between the "bid" and "ask" price of a stock.

The bid is the price the dealer is willing to pay to buy from you, be it your used car or a stock you're selling. If you roll onto a car lot with a 1993 four-door Ford Escort LX Hatchback with 100,000 miles, you can expect the dealer to pay $675 if it's in good condition, according to Kelley Blue Book. That's the "bid" price.

But if you went to the dealer to buy the same car, the dealer would sell it to you for $2,220. That's the ask price. The "spread" is the difference between the two: $1,545 in the case of the car.

The same goes for stocks. If you're looking to sell a stock, a broker will offer to buy it for one price, the bid. And if you're looking to buy it, the broker will offer to sell it to you for another, higher ask price. The spread is the broker's profit.

Luckily for everyone, other than brokers, the difference between bid and ask prices has gotten quite small. For instance, the bid on General Electric stock recently was $32.77 and the ask $32.79. The more frequently a stock trades, the closer the bid and ask get. In other words, the spread gets smaller.

You can see the bid and ask prices on any stock at money.usatoday.com. Put the stock's name or ticker symbol in the Quick Quote box. Here's a link to the page with GE's information.

Which should you pay when you're buying? The ask price. That's the price the broker will charge you. When you're selling, you will get the bid price.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.