3. Flat Price, Accrued Interest, and the Full Price
d. describe and calculate the flat price, accrued interest, and the full price of a bond;
What is accrued interest of a bond?
If an investor sells a bond between coupon payments and the buyer holds it until the next coupon payment, the entire coupon interest earned for the period will be paid to the buyer. The seller gives up the interest from the time of the last coupon payment to the time until the bond is sold. The amount of interest over this period that will be received by the buyer (even though it was earned by the seller) is called accrued interest.
What is full price (dirty price) in a bond sale? What is a flat price (clean price)?
- The amount that the buyer pays the seller the agreed upon price for the bond plus accrued interest is called the full price (dirty price).
- The agreed-upon bond price without accrued interest is simply referred to as the flat price (clean price).