Bond Features

The term ‘spread’ refers to the monetary value separating the ask price from the bid price, with the ask price usually being greater than the bid price. This spread usually indicates the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept.

The main reason behind the differing bid-ask spreads across assets is varying levels of liquidity. The bid-ask spread of a given asset is the de facto measure of market liquidity.

The bid-ask spread can be expressed in monetary value or percentage. When the market is highly liquid, spread values can be very small. However, when the market is less liquid, they can be large. A spread can also be measured on a relative or an absolute basis. An absolute spread measures the difference between the bid and ask price.  A relative spread measures the percentage difference between the bid and ask prices. 

Calculation of Bid-Ask Spread: 

Spread = (Ask/Offer Price- Bid/Buy Price)*100

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