Fixed Income
Bond Flat Price and What the Market Is Really Quoting
When bonds trade in the market, the price you see quoted is often not the full amount you actually pay. This quoted price is known as the bond flat price. It represents the value of the bond excluding any interest that has accumulated since the last coupon payment.
Understanding flat price is essential because it separates the bond’s market value from timing-related interest adjustments.
What Bond Flat Price Really Is
The bond flat price is the quoted price of a bond without accrued interest.
It reflects the market’s assessment of the bond’s value based on:
- interest rates
- credit risk
- maturity
- coupon structure
Accrued interest is handled separately.
Why Markets Quote Flat Prices
Flat prices make bond comparison easier.
If bonds were quoted with accrued interest included, prices would rise steadily between coupon dates and then drop on the coupon payment date. That movement would reflect timing, not changes in value.
By quoting flat prices:
- price changes reflect market forces
- comparisons across bonds remain meaningful
This convention is widely used in fixed income markets.
Flat Price vs Full Transaction Price
Although bonds are quoted on a flat price basis, the actual amount paid by the buyer includes accrued interest.
That full amount is sometimes referred to as the dirty price. The separation ensures:
- the seller is compensated for earned interest
- the quoted price stays clean and comparable
This distinction is frequently tested in exams.
How Accrued Interest Fits In
Accrued interest accounts for the interest earned since the last coupon date.
It does not change the bond’s economic value. It only reallocates income between buyer and seller based on holding period.
This is why accrued interest is added after the flat price is determined.
Flat Price and Coupon Dates
On the coupon payment date, accrued interest resets to zero.
At that point:
- flat price equals full transaction price
- no interest adjustment is required
Between coupon dates, the gap between flat and full price grows steadily.
Common Student Misunderstandings
Many students think flat price is what the buyer actually pays. It is not.
Others assume flat price ignores interest entirely. It does not it simply separates it.
Some confuse flat price with present value calculations.
These misunderstandings often appear in exam questions.
Closing Reflection
Bond flat price isolates market value from timing effects. It allows prices to reflect interest rates and credit risk rather than calendar mechanics. For CFA and FRM preparation, the key is understanding why flat prices are quoted and how accrued interest completes the transaction price. Once that logic is clear, bond pricing conventions become much easier to follow.
