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Fixed Income
Interactive visualization of bond pricing conventions. See how flat price evolves smoothly while full price follows a saw-tooth pattern. Explore accrued interest buildup, coupon payment drops, and settlement mechanics.
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Study aids
The errors candidates make on this topic, and what to carry into the exam.
Common mistakes
Exam tips
When a bond trades between coupon payment dates, two prices exist: the flat price (also known as clean price) and the full price (also known as dirty price). Understanding the difference is essential for bond trading and CFA exam preparation.
The flat price is the quoted price of a bond that does NOT include accrued interest. It changes smoothly over time, reflecting:
Pull-to-par: As the bond approaches maturity, the flat price converges toward face value regardless of whether it trades at a premium or discount.
Yield effect: If the yield to maturity equals the coupon rate, the flat price equals par. If YTM is below the coupon rate, the bond trades at a premium (above par). If YTM is above the coupon rate, the bond trades at a discount (below par).
The full price is what the buyer actually pays. It equals the flat price plus accrued interest:
The full price follows a saw-tooth pattern because accrued interest builds up linearly between coupon dates and then drops to zero when the coupon is paid.
Accrued interest compensates the seller for the portion of the coupon earned but not yet received:
Between coupon dates, AI increases linearly from 0 to the full coupon amount. On the coupon payment date, AI resets to zero.
The full price increases steadily between coupons (flat price change + AI buildup) and then drops sharply on the coupon date by exactly the coupon amount. This creates the characteristic saw-tooth pattern.
Flat prices are used for quotation because they reflect genuine changes in market conditions (yield changes, credit events) without the artificial jumps caused by accrued interest. Two traders can compare flat prices and immediately assess whether the bond has become cheaper or more expensive, regardless of where in the coupon cycle the comparison is made.
Key CFA Insight
Bonds are quoted using the flat price but traded at the full price. The accrued interest compensates the seller for the coupon earned but not yet received. At each coupon date, accrued interest resets to zero and the full price drops by the coupon amount ($50.00), creating the characteristic saw-tooth pattern.
Tasks:
• Move the settlement date and observe the linear growth of accrued interest
• Identify what happens to the full price on coupon dates (green dashed lines)
• Compare the smooth flat price with the saw-tooth full price
• Change the coupon rate and observe the size of the saw-tooth pattern
• Set YTM above the coupon rate to see a discount bond, and below for a premium bond