Question-51: What is clean price or flat price for a bond?

Answer: A clean price or a flat price is a price which is dirty price minus accrued interest.

Question-52: In United states what price is quoted?

Answer: In United States price is quoted is a clean price. But buyer has to pay the accrued interest to the seller, means in reality it would pay the full price.

Question-53: What are the fixed Income traders usually calculate?

Answer: Fixed Income trader usually calculated the price or yield. And to calculated the

• Desired Price: They use yield or yield spread as input sometime also known as discount margin.
• Desired Yield: To calculate the desired yield, trader provide input as a price. And solve for the yield.

Question-54: As a fixed Income investor what all are the possible ways by which investor can make money?

Answer: If you are an investor and purchasing a bond then obviously you want return it could be in dollar or any native currency in which you have purchased this bond. Following are the possible ways by which this return can be realized

• Coupon receivables: If investor hold the bond till coupon is made. Then he receives coupon from issuer on that bond.
• Capital Gain (Capital loss): If bond is sold or if investor hold it till it get mature. It is possible here investor may make loss if sell it lower price.
• Reinvestment (interest-on-interest): Whatever coupon is received is re-invested then he can make more money on this.

However, please note that all above three yield measures are captured in percentage term and not the actual dollar or currency form.

Question-55: What do you mean by current yield?

Answer: Current yield is calculated based on the coupon on the bond. Below is the formula to calculate the current yield

Current yield = Actual amount received as coupon/ Bond Price

For example, if a bond is currently selling at price of $800 for $1000 par value. And coupon is 6%. Then you can calculate the current yield as below

= $60(annual coupon)/$800

= .075

= 7.5 %

The reason it is high then actual coupon. Because investor is buying the bond in less than its par value (on which coupon is declared). You are actually paying only $800 to buy this bond, but annually receiving coupon of 6%

Hence, you can see current yield is only considering the Coupon amount and not anything else, from which more return can be realized. Like re-investing this coupon and selling bond at more price then buy price. Which we will discuss in next questions.