How do we know if we should use the BID or ASK price when calculating - ProProfs Discuss
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How do we know if we should use the BID or ASK price when calculating the price of a bond in this course?

Asked by Erin, Last updated: Oct 04, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

If i told you that you had to buy a bond right now, and the bid was 99.25 and the askwas 99.75, how much would you have to pay? to answer this question, you need tofigure out who is going to sell you a bond. if the bid represents the highest amountsomeone is willing to pay to buy a bond, and the ask is the lowest price someone iswilling to accept to sell their bond, which price are you going to use? youll have to usethe ask price. youll have to pay the lowest price someone is willing to accept in sellingthe bond.if you use the bid price, what you are saying is that you are buying your bond fromsomeone who is willing to pay 99.25 to buy a bond. but we know from the bid and askthat the absolute lowest price anyone is willing to sell the bonds they own is at a priceof 99.75.the opposite holds true if i told you that you had to sell your bonds right now. tofigure out the price, you would need to know what the highest price someone is willingto pay for the bonds right now. that would be the bid price of 99.25.
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