CFA Practice Question
A 7.5% semiannual coupon bond with 12 years to maturity is being quoted at an ask yield of 7.67% and bid yield of 7.69%. What is the bid-ask spread on this bond's price, assuming the bond has a face value of $1,000?
A. 1.47
B. 1.52
C. 1.54
Explanation: We need to compute the bond prices at the two yields: ask and bid. For the bid price, we use the higher yield, as it would give us the lower price. Using a financial calculator, FV = 1,000; PMT = 37.50; I/Y = 3.845; N = 24; CPT PV = 985.28.
For the ask price, we use the lower yield: 7.67%. FV = 1,000; PMT = 37.50; I/Y = 3.835; N = 24; CPT PV = 986.82.
Bid - ask spread = 986.82 - 985.28 = 1.54
User Contributed Comments 9
| User | Comment |
|---|---|
| Janey | You will need to go to at least 4 decimal places with this one. using only 2 I get an answer of 1.53 which is in between B and C. |
| julescruis | thank you janey, i went crazy on this one |
| dany1978 | why is PMT equals to 37.50 ? |
| achoi0 | 1000x(.075/2)=37.50 semi-annual coupon |
| ninad123 | No where in Schweser I encountered this one.. Good add to knowledge. |
| Cfrey | I think you can also find PVBP and multiply by 2 if that is easier for you |
| thebkr7 | I read all of Schweser twice and A.N. is by far the more comprehensive one... and +$300 cheaper! |
| gyee2012 | (.0767+.0769) * 10 = 1.536 *Saw spread = difference Heuristic calc... |
| ctschro | gyee2012 - nice |