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How Bid–Ask Spreads Relate to Bond Prices and Yield Curves

Article Quant Q&A · Author: quallenjäger
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Summary

A bond does not have one uniquely defined price at a given moment: buyers generally pay the ask, while sellers receive the bid. A yield calculated from those different transaction prices can therefore differ, producing distinct yields for the bid and ask sides rather than one definitive curve.

The answer frames the spread as information about where a security can be bought or sold, while the relevant price for valuation depends on the trade being considered. It offers a useful market-pricing distinction, but does not explain how to construct a yield curve from bid or ask quotes, quantify liquidity effects, or discuss how conventions vary across markets. The short response leaves the original question about liquidity's broader impact unresolved.

Key ideas

  • A bond's executable price depends on whether the investor is buying or selling.
  • Bid and ask prices can imply different yields for the same bond.
  • A yield curve based on market quotes depends on the chosen side of the spread.
  • The response does not detail broader liquidity effects on curve construction.

Tags

Fixed incomeMarket microstructure
Full text
# Yield curve and bid ask spread


# Yield curve and bid ask spread












For the valuation of a bond, is the bid ask spread somehow reflected in the yield curve? Considering zero coupon bond, one would expect to have an bid price and ask price and therefore if I am calculating the zero rate, I will have two value and this results in two different zero curves. How is it about yield curve? How would the liquidity affect the yield curve?

## Answer by amdopt (score 1, accepted)

https://quant.stackexchange.com/a/34096

For a bond, or any security for that matter, the price you pay (or receive)is the price you get(or receive). The spread is only good for knowing where you can buy (or sell) at any given moment in time. Your "price" is where you execute your order. There is (almost) never a singular price that you can consider to be "the" price. It depends if you are buying or selling. I'm sure this sounds confusing...welcome to reality

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.