What it means
The percentage convention exists because bonds come in many denominations. Quoting everything against a base of 100 lets a trader compare a $1,000 corporate bond with a $100,000 government note without doing arithmetic in their head.
A quote above 100 is called a premium and a quote below 100 is a discount. Premium simply means the coupon is generous relative to current market rates, and discount means the opposite, so the price adjusts until the bond yields roughly what the market demands.
Government bond markets often quote in thirty-seconds rather than decimals. A quote of 99-16 means 99 and 16/32, or 99.50, and a further suffix such as 99-16+ adds another sixty-fourth, which is why these quotes look cryptic to newcomers.
Most quotes are clean prices, meaning they exclude interest that has built up since the last coupon payment. The dirty price, which is what actually changes hands, is the clean price plus accrued interest, and forgetting this is the single most common error in settling a bond trade.
A full quote also carries a bid and an ask. The bid is what a dealer will pay you, the ask is what they will sell at, and the gap between them is the spread that compensates the dealer for making a market.
Many screens show yield alongside price, and professionals often talk in yield rather than price. Since price and yield move in opposite directions, saying a bond "traded at 4.25%" and saying it "traded at 98.10" can describe the same transaction.
In practice
Real-world examples.
Example
A corporate treasurer reviewing surplus cash sees a bond quoted at 97.60 and assumes it is cheap. Her adviser points out the coupon is only 2%, so the discount simply brings the yield into line with the 4.5% currently available elsewhere.
Example
A trainee at a brokerage misreads a Treasury quote of 101-08 as 101.08 rather than 101.25. On a $5,000,000 trade the difference is $8,500, which the settlement team catches before the trade confirms.
Example
A family office buying a bond three weeks before a coupon date is surprised that the invoice exceeds the quoted price. The extra line is accrued interest owed to the seller, and it returns in full when the coupon lands.
Formula
Calculation
Purchase price = face value x quoted price / 100
Accrued interest = face value x annual coupon rate x days since last coupon / 360
Total settlement = purchase price + accrued interest
An investor buys $250,000 of face value in a corporate bond quoted at 102.375 with a 5% annual coupon. The purchase price is $250,000 x 102.375 / 100 = $255,937.50.
Sixty days have passed since the last coupon date, and the market uses a 30/360 day count. The annual coupon is $250,000 x 5% = $12,500, so accrued interest is $12,500 x 60 / 360 = $2,083.33.
The total amount that settles is $255,937.50 + $2,083.33 = $258,020.83. The extra $2,083.33 is not a cost as such; it repays the seller for the interest they earned but had not yet been paid, and the buyer gets it back in the next full coupon.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Northmarch Wealth, an invented advisory firm, was building a fixed income allocation for a client and asked two dealers for prices on the same government bond. One came back with 97-08 and the other with 97.30, and the junior analyst recommended the second because the number looked higher.
The mistake was mixing conventions. The first quote was in thirty-seconds, so 97-08 meant 97 + 8/32 = 97.25, while the second was a plain decimal of 97.30. The second dealer was indeed slightly more expensive, but only by 0.05 of a point, not by the amount the analyst had assumed.
On the $1,000,000 the fictional firm was buying, the first quote cost $1,000,000 x 97.25 / 100 = $972,500 and the second cost $1,000,000 x 97.30 / 100 = $973,000, a difference of $500. The firm added a one-line check to its dealing sheet requiring every quote to be converted to decimals before comparison.
Watch out
Common mistakes.
- Reading a quote as a dollar price, so a bond quoted at 98 is assumed to cost $98 rather than 98% of its face value.
- Budgeting only the clean price and being caught short by accrued interest on the settlement date.
- Confusing thirty-seconds notation with decimals, which quietly misprices government bond trades by fractions that add up on large amounts.
Questions
People also ask.
Why do bonds trade above 100?
Because their coupon is higher than the rate the market currently demands, so buyers pay a premium to secure the better income stream.
What is the difference between a clean price and a dirty price?
The clean price excludes accrued interest and is the number quoted, while the dirty price includes it and is the amount actually settled.
Do bond quotes include dealer commission?
Usually not as a separate line. The dealer's compensation is normally built into the spread between the bid and the ask.
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