How is the Barclays Capital Liquidity Cost Score calculated for a spread-quoted bonds?
What will be an ideal response?
For bonds that are quoted in terms of their bid-ask spread (referred to as spread-quoted bonds), the LCS is defined as
(Bid − Ask spread in basis points) × Spread duration
For example, if a credit-risky bond has a spread duration of 4 and a bid-ask spread of 40 basis points, the LCS is 4 times 40 basis points, which is equal to 160 basis points or 1.6%.
The interpretation of the LCS is as follows: it is the roundtrip cost as percent of the bond's value "of immediately executing a standard institutional transaction." Roundtrip cost refers to the cost of buying and then selling a bond. A standard institutional transaction is for $3 to $5 million of par value. An LCS for a bond of 1.6% trading at a bid price of 85 means that the current immediate roundtrip cost would be 1.6% of the bond's price. A higher LCS value means worse liquidity.
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