How Bonds Are Quoted and Traded

Why this matters

The lessons so far have treated a bond's price as a known number. For a share of stock it nearly is: there's a quote on an exchange, and Bid, Ask, and the Spread showed how to read it. Bonds are bought differently. The quoted price isn't the amount you pay, the cost of trading rarely appears as a separate fee, and two investors can pay different prices for the same bond on the same day. None of this is hidden, exactly, and all of it can be checked. This lesson shows how. The rules described are US rules.

Reading a price

Bond quotes are expressed as a percentage of face value. A $1,000 bond at par is quoted at 100. A bond quoted at 105 costs 105% of its face value, or $1,050, and one quoted at 95 costs $950.¹ The same number works for any amount: at a quote of 98.75, $10,000 of face value costs $9,875 and $250,000 costs $246,875.

Quoting this way makes bonds comparable. A price of 105 says the bond is at a premium and 95 says it's at a discount, whatever the size of the holding, and Yield Measures turns either into a yield.

Accrued interest

A bond usually pays its coupon twice a year, to whoever owns it on the payment date. If you sell between payments, you've held the bond for part of the period and would receive nothing for it. So the buyer pays you for it. A seller is entitled to the price of the bond plus accrued interest, the interest that has built up day by day since the last coupon.¹

The note is quoted at 98.75. The last coupon was paid 61 days ago, and the current coupon period is 184 days long.

Step	Sum	Result
Quoted price	98.75% × $10,000	$9,875.00
One coupon payment	$10,000 × 4.5% ÷ 2	$225.00
Accrued interest	$225 × 61 ÷ 184	$74.59
Amount the buyer pays	$9,875.00 + $74.59	$9,949.59

The buyer isn't out of pocket. In 123 days they receive the full $225 coupon, of which $74.59 repays what they handed over and $150.41 is interest for the days they held the note.

The quoted price, without accrued interest, is called the clean price. The amount actually paid is the dirty price, or full price. Prices are quoted clean for a good reason. A bond's full price climbs steadily as interest builds up and drops by the amount of the coupon on the day it's paid, a sawtooth that has nothing to do with the bond's value. The clean price moves only when the market's view of the bond does.

How the days are counted depends on the kind of bond. For Treasuries, yields are based on the actual number of days in the period and in the year, and not on a simplified calendar of 30-day months and a 360-day year.² Other kinds of bond follow their own conventions, and FINRA offers an accrued interest calculator for working out the figure.¹

The rest of this lesson is for members

Still to come in this lesson: A market of dealers, Liquidity, Checking a price, New issues and the secondary market, the key takeaways, and 2 quiz questions with explanations.

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