Match each bond market term and yield convention with its corresponding operational description.
- Accrued InterestInterest earned by the seller since the last payment date, which the buyer pays to the seller at transaction settlement.
- Trading FlatA condition where a bond transacts without added accrued interest, typical when an issuer is in default or for zero-coupon bonds.
- Nominal YieldThe fixed annual interest payout stated on the bond certificate, calculated strictly as a percentage of par value.
- Current YieldThe return metric calculated by dividing a bond's annual coupon interest payment by its current secondary market price.
Answer
Accrued Interest pairs with the interest earned since the last coupon date paid by buyer to seller; Trading Flat pairs with bonds trading without accrued interest due to default or zero-coupon status; Nominal Yield pairs with the fixed coupon rate based on par value; Current Yield pairs with annual interest divided by secondary market price.
Each bond market term accurately corresponds to its defining operation: Accrued interest reimburses the seller for earned interest up to settlement; trading flat applies when accrued interest is omitted due to default or zero-coupon structure; nominal yield is the stated coupon rate relative to par value; and current yield evaluates annual interest payments against secondary market price.
Step-by-Step Solution
Key Concept
Bond Trading Conventions and Yield Definitions