How to Read a Bond QuoteSome background helps
Clean price, dirty price, three different yields and a settlement convention that changes the answer. What each number means and which one you actually pay.
The first thing to establish: what is being quoted
- Bonds are quoted in price in some markets, in yield in others, and in spread in credit. All three describe the same instrument and none converts to another in your head.
- Price is quoted per 100 of face value. "98.42" means 98.42% of face — a €100,000 holding costs €98,420 before accrued interest.
- The convention follows the market, not the bond. Governments in price, money-market instruments in yield, credit in spread over a reference. Getting this wrong is the fastest way to misread a screen by an order of magnitude.
1. Clean price versus dirty price — what you actually pay
$$ \text{Dirty price} = \text{Clean price} + \text{Accrued interest} $$
- The clean price is quoted; the dirty price is settled. Accrued interest compensates the seller for coupon earned since the last payment.
- Clean prices are quoted precisely so the chart does not saw-tooth every coupon date. The economics are unchanged; the presentation is smoother.
- Run a real example through the accrued interest calculator — the gap between the quote and the cash amount is routinely 1–3% and surprises people once.
2. Which yield is on the screen
| Yield | What it assumes | When it misleads |
|---|---|---|
| Current yield | Coupon ÷ price. Nothing about maturity | Always, for anything but a perpetual |
| Yield to maturity | Held to maturity, coupons reinvested at the same yield | Both assumptions are usually false |
| Yield to worst | The lowest yield across all call dates | The honest one for callable bonds |
| Running / flat yield | Income only | Ignores the pull to par entirely |
- A bond trading below par has a YTM above its coupon, because part of the return is the price rising to par at maturity. Above par, the reverse. The YTM solver makes the relationship concrete.
- For a callable bond, quote yield to worst. Anything else prices an outcome the issuer controls and will not choose if it hurts them.
3. Day count: the convention that silently changes the number
- ACT/ACT — most government bonds. Actual days over actual days in the period.
- 30/360 — most corporate bonds in the US and many European issues. Every month is 30 days, every year 360.
- ACT/360 — money markets and floating-rate notes. This is why a money-market rate is not directly comparable to a bond yield without conversion.
- ACT/365 — sterling markets and several others.
- The difference between ACT/360 and ACT/365 on the same nominal rate is about 1.4% of the rate — small per period, and enough to make two "identical" quotes disagree. See the conventions reference.
4. Settlement: when the money moves
- T+1 for most government bonds, T+2 for corporates in many markets, and longer for new issues. Accrued interest is calculated to the settlement date, not the trade date.
- Ex-dividend periods exist in some markets: buy inside the window and the seller keeps the next coupon, which flips the accrued interest negative.
- A failed settlement is not free — fails charges apply in major markets, which is one reason the repo market exists.
5. Spread quotes: comparing credit honestly
- G-spread — over an interpolated government yield. Simple, and distorted by the choice of government bond.
- I-spread — over the interpolated swap curve. Cleaner for comparing across issuers.
- Z-spread — the constant spread that reprices every cash flow off the zero curve. The workhorse, and the one to use when maturities differ.
- Asset-swap spread — what a funded buyer actually earns after swapping the fixed coupon away. Diverges from Z-spread when the bond trades far from par — see asset swaps.
- All four, side by side and computed on one bond, are in the spread calculator.
6. Comparing two bonds without fooling yourself
- Never compare coupons. A coupon is a cash-flow schedule, not a return.
- Compare yields on the same basis — same day count, same compounding frequency, same yield type.
- Then compare duration. Two bonds at the same yield with different durations are different risks entirely; the duration calculator quantifies it.
- Then check optionality. A callable bond's extra yield is the option you sold, not a free pickup.
- Then check liquidity. An off-the-run bond yields more partly because exiting it costs more. That is compensation, not alpha.
The checklist
- Price or yield or spread — which convention is this market quoting?
- Clean or dirty — what will actually leave my account?
- Which yield, and for a callable bond, is it yield to worst?
- Day count and frequency — are the two quotes on the same basis?
- Duration — is this the same risk, or just the same yield?
- What is the exit spread in a market where I may be the only seller?
Information and education only. Conventions vary by market, instrument and jurisdiction, and change. This page describes common practice for teaching purposes; the terms of any actual bond govern, and nothing here is advice.