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- 3/24/08
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In Neftci's book "Principles of Financial Engineering" on pg 37, first paragraph he writes:
"The bid-ask spread suggests that the interest is the asking rate"
I don't understand this. First of all, what exactly is the bid-ask spread here? I would think the "bid" rate would be zero: if I borrow money from a bank, my first offer to them would be to borrow money for free (at which point they'd laugh in my face and *tell* me what the rate really is). I don't really see anything here that hints at a bid-ask spread. So exactly what is he talking about here?
context:
Someone borrows $100 at time t_0 and pays back $105 at time t_1 at a rate of 5% per annum.
Thanks!
Pete
"The bid-ask spread suggests that the interest is the asking rate"
I don't understand this. First of all, what exactly is the bid-ask spread here? I would think the "bid" rate would be zero: if I borrow money from a bank, my first offer to them would be to borrow money for free (at which point they'd laugh in my face and *tell* me what the rate really is). I don't really see anything here that hints at a bid-ask spread. So exactly what is he talking about here?
context:
Someone borrows $100 at time t_0 and pays back $105 at time t_1 at a rate of 5% per annum.
Thanks!
Pete