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Bond Dealer Spread

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Bond prices are quoted in terms of bid and offer. The dealer spread is the difference between the bid (the price a bond trader pays for a bond) and the offer (the price she offers it for sale).

 

Bond Dealer Spread

 

Function

Bond dealer spread includes commission and fees. It works just like any other vendor, who buys an item and marks it up to create profit.

 

Types

The size of the spread varies depending on the size of the trade. An odd lot, fewer than 1,000 bonds, carries a much wider spread than a round lot of 1,000 bonds or more.

 

Significance

The width of the spread covers the cost of processing the trade plus any commissions. Fewer bonds means a smaller transaction and a higher percentage of spread.

 

Results

The amount of spread affects return on investment. Bonds trade on yield to maturity, which is a representation of how much interest you will receive on the bond until it matures and returns principal of $1,000. The higher the price you pay, the lower the yield to maturity.

 

Considerations

Yield to maturity is figured on the offered price, but when you buy a bond from a brokerage firm, you may be paying additional fees. These charges will lower your return on investment.

 

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