Effective spread

Twice the gap between a trade's price and the midpoint prevailing when the order arrived. Unlike the quoted spread, it reflects trades done inside or outside the quote, so it measures the cost actually paid.

Where you will meet it

Effective spread appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain how credit default swaps can be used in an actively managed fixed-income portfolio
  CFA Level III · Portfolio Management Pathway

  “Contracts use standard coupons, with an upfront payment settling the difference from the market spread; for the protection seller, the value change is roughly −(change in spread × effective spread duration × notional).”

• Compute effective spreads and VWAP-based estimates of transaction cost, and explain what they show
  CFA Level III · Portfolio Construction

  “The effective spread compares the trade price with the prevailing midpoint: effective spread = 2 × |trade price − midpoint|.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with E · Glossary