Bond Foundations · Bonds Explained

Read the quotation unit

Many bonds are quoted as a percentage of face value. A quote of 98.40 means 98.40% of par, not $98.40 for every possible trade size. On $10,000 face value, that clean price represents $9,840. A quote above 100 represents a premium to par.

Quotation conventions vary across markets. Some securities use fractions or are quoted by yield. Confirm the unit, currency and minimum denomination before entering an order.

Add the earned interest

Between coupon dates, the seller has held the bond for part of the interest period. Accrued interest usually compensates the seller for that time. The buyer then receives the next full coupon, subject to the security’s entitlement rules. Clean price excludes accrued interest. Full or dirty price includes it.

For a hypothetical $10,000 bond with a 4% annual coupon paid twice a year, each regular coupon is $200. Assume 45 of 180 days have elapsed under the applicable convention. Accrued interest is $200 × 45 ÷ 180 = $50. At a clean price of $9,840, the full amount is $9,890 before fees.

Avoid counting accrued interest as a fee

The $50 is not automatically broker compensation. It transfers the earned portion of the coupon to the seller. Commissions and dealer compensation are separate. Comparing one full quote with another clean quote creates a false price difference.

Actual day counting may use calendar days or a specified convention such as 30/360. Settlement, not the moment you notice the quote, is the relevant reference for the invoice. Special coupon entitlement periods require additional care.

Reconcile the confirmation

Ask for face amount, clean consideration, accrued interest, fees and total settlement cash. Check these against the confirmation and the same security identifier. A similar issuer name does not establish that two quotations refer to the same bond.

Try it yourself

A bond position has $2,000 face value and a clean quote of 101.25. Accrued interest is $12 and the explicit fee is $4. What cash is needed?

Show the worked answer

Clean consideration is $2,025. Adding $12 accrued interest and the $4 fee gives $2,041.

Further reading

Educational material. Examples are hypothetical and do not recommend a security or a personal allocation. Contract terms and market conventions vary.

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