Full versus flat bond price (aka, cash vs. quoted or dirty vs. clean price, FRM T3-23)

[here is my xls trtl.bz/2NLtTRX] The bond's present value (DCF) at any given point in time is called its "full price" (aka, cash, dirty). This full price is discontinuous because coupons pay discontinuously. If we subtract the accrued interest (AI) from the full price, we get the "flat price" (aka, quoted, clean). It is the flat price smoothly "pulls to par." Discuss this video here in our FRM forum: trtl.bz/2VqV9J2.

[@krisnaydenov]

Thanks David for all your videos! That was in the today's exam of Part 1 Nov 2018!

[@maddoglord]

You the man harpdog, very easy to absorb.

[@bionicturtle]

Thank you for watching! Glad to hear that this was helpful!

[@diontaedaughtry974]

Thank you this was very helpful and informative 👍👍

[@shadrinan90]

Thank you for a good graph as an example

[@ericcuellar9549]

very helpful, thank you!

[@nncc5986]

thanks a lot!

[@isp_accountinganalysisanda3721]

Thanks David! 🤝

[@bhdkid1]

@bionicturtle
Hi there, thanks so much for the great content. I noticed that you calculated accrued interest using a compound interest formula. Upon reading my Bond Math textbook, they calculate the accrued interest using a simple interest formula. Both methods provide the same answer after rounding. Which method is technically correct?
I know the bonds use compound interest calculations but since the interest is not compounded as the accrued interest occurs inbetween coupon payments, shouldn't a simple interest calculation be used?
Thanks

[@bionicturtle]

Thanks. Actually I follow the convention and compute the AI with simple interest per AI = 4.0% * 90/180 = $2.00. I think you are referring to my step where I retrieve the full (aka, cash, invoice, dirty) price as of 4/1/2018 which is exactly halfway in between coupons: 105.46*(1 + 7.0% yield/2)^(90/180) = 107.29. That calculation does employ semi-annual compound frequency at the 7.0% yield to "move" the full price from 105.46 as of 1/1/2018 to 107.290 as of 4/1/2018. This is because the yield is 7.0% per annum with semi-annual compound frequency. But the accrued interest (AI) by convention is simple interest. However, it really is just a convention. The decisive value is the full price because it is the DCF. In a different culture, we could agree to a different AI convention, and we'd get a different resultant flat price per flat = full - AI. In the equation full = flat + AI, it's really the left-hand side that matters. *Both the AI and the flat (quote) price are mere conventions!* I hope that's helpful,

[@bhdkid1]

@@bionicturtle Yes thanks so much for taking the time to clear up my question and answer!