What Is Flat Bond?
Flat bond is a time frame given to the price of a bond when it does not include any gathered interest. Amassed interest is the portion of a bond’s coupon value that the holder earns in between scheduled coupon expenses.
A flat bond’s price is referred to as its clean price.
Key Takeaways
- A flat bond is one that does not account for gathered interest owed to the bondholder.
- Flat bond prices are normally quoted in American markets, while the overall price is further no longer atypical in European markets.
- A bond can also be quoted as a flat bond if no interest is nowadays due, if it is in default, or if it settles on the equivalent date since the interest value date.
Figuring out Flat Bonds
Some bonds pay interest to bondholders periodically, known as its coupon value. When prices of interest-bearing gear are quoted, they are each quoted at an entire price or flat price to reflect those interest expenses. A bond that is quoted with a flat price is referred to as a flat bond. A flat price does not include any gathered interest. Since gathered interest on a bond does not exchange the yield-to-maturity (YTM), the flat bond price is normally quoted to steer clear of misleading consumers on the daily build up throughout the whole price as a result of interest gathered.
An entire price, steadily known as a dirty price, incorporates the interest gathered owed to a bondholder since the last coupon value and is considered in the price of the bond. When an investor sells a bond at some point between the remainder coupon value and the next coupon value, they do so with interest gathered.
For example, if interest expenses on a bond are scheduled for February 1 and August 1 every year until the bond matures, and the bondholder sells the bond on April 15, the bond will have gathered interest from February 1 to April 15. The seller gives up the interest from the time of the remainder coupon value to the time until the bond is purchased.
The price of a flat bond is calculated as:
- Flat price = whole (dirty) price – gathered interest
Where:
- Amassed interest = coupon value for the period * (time held after the remainder coupon value or coupon period)
When to Quote Flat Bonds
There are 3 standard reasons {{that a}} bond would industry flat, that is, not have any gathered interest attached to it:
- No interest is nowadays due on the bond in step with the date of sale and words of the bond’s issue.
- The bond is in default. Bonds which could be in default are to be traded flat without calculation of gathered interest and with the availability of the coupons that experience not been paid by way of the issuers.
- The bond settlement date is similar date since the interest is paid and, because of this truth, no additional interest has gathered previous the quantity already paid out.
Remember that the coupon period is the choice of days between every coupon value date. Corporate and municipal bond issuers think a 30-day month and a 360-day calendar to calculate the gathered interest on a bond. Alternatively, the gathered interest on government bonds is typically made up our minds on the basis of the actual calendar day from its date of issuance (known as the true/actual day rely).
Example: Flat Bond Calculation
Say the coupon rate on a $1,000 par value bond that may pay interest semi-annually on February 1 and August 1 every twelve months is 5%. The bondholder sells the bond on April 15 throughout the secondary market for a whole price of $995.
The steps to calculate the flat bond price are as follows:
- Coupon value in step with period = 5% ÷ 2 * $1,000 = $25
- Mentioned coupon period—think a 30-day month and a 360-day calendar. (Using our example, the coupon value in step with period is 6 months * 30 days = 180 days.)
- Choice of days the bond was once as soon as held after the remainder coupon value faster than selling = 2.5 months * 30 days = 75 days
- Amassed interest = $25 * (75 ÷180) = $10.42
- Price of flat bond = $995 – $10.42 = $984.58
