Flat Bond

What Is Flat Bond?

Flat bond is a term given to the price of a bond when it incorporates no accrued interest. Accrued interest is the portion of a bond's coupon payment that the holder in the middle of between scheduled coupon payments.

A flat bond's price is alluded to as its clean price.

Seeing Flat Bonds

A few bonds pay interest to bondholders periodically, known as its coupon payment. At the point when prices of interest-bearing instruments are quoted, they are either quoted at a full price or flat price to mirror those interest payments. A bond that is quoted with a flat price is alluded to as a flat bond. A flat price incorporates no accrued interest. Since accrued interest on a bond doesn't change the yield-to-maturity (YTM), the flat bond price is regularly quoted to try not to delude investors on the daily increase in the full price because of interest accrued.

A full price, otherwise called a dirty price, incorporates the interest accrued owed to a bondholder since the last coupon payment and is viewed as in the price of the bond. At the point when an investor sells a bond at some point between the last coupon payment and the next coupon payment, they do as such with interest accrued.

For instance, on the off chance that interest payments on a bond are scheduled for February 1 and August 1 consistently until the bond develops, and the bondholder sells the bond on April 15, the bond will have accrued interest from February 1 to April 15. The seller surrenders the interest from the hour of the last coupon payment to the time until the bond is sold.

The price of a flat bond is calculated as:

Flat price = full (dirty) price - accrued interest

Where:

Accrued interest = coupon payment for the period * (time held after the last coupon payment or coupon period)

When to Quote Flat Bonds

There are three normal reasons that a bond would trade flat, or at least, not have any accrued interest connected to it:

No interest is as of now due on the bond as indicated by the date of sale and terms of the bond's issue.
The bond is in default. Bonds that are in default are to be traded flat without calculation of accrued interest and with the delivery of the coupons which have not been paid by the issuers.
The bond settlement date is a similar date as the interest is paid and, consequently, no extra interest has accrued past the amount previously paid out.

Note that the coupon period is the number of days between every coupon payment date. Corporate and municipal bond issuers expect a 30-day month and a 360-day calendar to compute the accrued interest on a bond. Be that as it may, the accrued interest on government bonds is generally determined on the basis of the genuine calendar day from its date of issuance (called the real/genuine day count).

Model: Flat Bond Calculation

Say the coupon rate on a $1,000 par value bond that pays interest semi-every year on February 1 and August 1 every year is 5%. The bondholder sells the bond on April 15 in the secondary market at a full cost of $995.

The moves toward work out the flat bond price are as per the following:

Coupon payment per period = 5% \u00f7 2 * $1,000 = $25
Stated coupon period — expect a 30-day month and a 360-day calendar. (Utilizing our model, the coupon payment per period is 6 months * 30 days = 180 days.)
Number of days the bond was held after the last coupon payment before selling = 2.5 months * 30 days = 75 days
Accrued interest = $25 * (75 \u00f7180) = $10.42
Price of flat bond = $995 - $10.42 = $984.58

Features

A flat bond is one that doesn't account for accrued interest owed to the bondholder.
A bond can likewise be quoted as a flat bond on the off chance that no interest is by and by due, assuming it is in default, or on the other hand assuming it chooses a similar date as the interest payment date.
Flat bond prices are ordinarily quoted in American markets, while the full price is more normal in European markets.