Flat Price, Accrued Interest, and the Full Price

Assume you sell a bond on March 15th that pays a 4% coupon. The coupon is paid semi-annually on January 1st and July 1st. You would have received 2% on January 1st, but what do you think happens to the interest earned from January 2nd to March 15th?

Incorrect. The buyer will be the official holder of the bond at the next coupon date and will receive the full coupon.

Incorrect. The seller does not forfeit interest generated between payments.

The __flat__ or clean price of a bond does not include accrued interest owed to the seller. The __full__ or dirty price of a bond adds the accrued interest to the flat price. The bond you are selling is quoted at a discount of 98. Do you think the quote represents the flat or full price?

Correct! Bonds are quoted on a flat or clean price, but trade on a full or dirty price. A flat bond price does not include accrued interest. Quoting bonds on a flat price is a way to standardize prices since bonds have various coupon payment dates and including accrued interest would lead to price rises every day before a coupon payment.

Incorrect. Bonds are quoted on a flat or clean price, but trade on a full or dirty price. A flat bond price does not include accrued interest. Quoting bonds on a flat price is a way to standardize prices since bonds have various coupon payment dates and including accrued interest would lead to price rises every day before a coupon payment.

In summary: [[summary]]

If you owned a bond that you wanted to sell, you probably would require that you are paid every dollar owed to you. If you were on the other side of the transaction, you would not want to pay a cent more for a bond than you have to. This is why it is important to understand how bonds are quoted, accrue interest, and trade.

Great job! Each day after a bond makes a coupon payment, it accrues interest until the next coupon date. A seller of a bond that is between coupon payments is owed the accrued interest for every day they owned the bond. On the next coupon date, the buyer of the bond will be the official holder and receive the full amount of the coupon payment. Therefore, on the settlement date when the buyer pays for the bond, they must include payment for the __accrued interest__ that is owed to the seller.

The seller will receive the full amount of the next coupon payment

The seller forfeits any interest generated between coupon payment dates

The buyer would pay the seller the proportional share of the interest earned since the last coupon date

Flat

Full

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