Reading Bond Quotes and Price Conventions

Misreading a bond quote costs real money. Confuse clean price with dirty price and you pay $15-25 more per $1,000 face value than you expected (the accrued interest you forgot to budget). Misread a Treasury quote of 99-16 as $99.16 instead of $995.00 and you miscalculate your position by a factor of ten. FINRA's TRACE system (active since July 2002) brought transparency to bond pricing, reducing transaction costs by 5-10 basis points for retail investors (Edwards and Harris, 2007), but that transparency only helps if you can decode what you're seeing.

The practical skill isn't memorizing formulas. It's recognizing which convention applies to which bond type, doing the quick mental math to convert quotes to dollars, and knowing that the price you see quoted is never exactly the price you pay at settlement.

Clean Price vs. Dirty Price (Why Your Settlement Is Higher Than the Quote)

Here's the pattern that surprises first-time bond buyers: you see a quote of 102.40, budget $1,024 per bond, then settlement costs $1,039.17. The difference is accrued interest (the $15.17 you owe the seller for holding the bond since the last coupon payment).

The point is: quoted prices are "clean" for comparability. Settlement prices are "dirty" because they include accrued interest. Every bond trade settles at the dirty price.

The formula: Dirty Price = Clean Price + Accrued Interest

Why bonds quote clean prices: Clean prices let you compare bonds regardless of where they sit in the coupon cycle. A bond one day after its coupon payment and another bond one day before look comparable on clean price (both near par, perhaps). But their dirty prices differ by nearly a full coupon payment. Clean pricing strips out this timing noise so you can evaluate the bond itself.

Why you pay the dirty price: The seller owned the bond during part of the coupon period and earned interest during that time. When you buy, you compensate the seller for "their" portion of the upcoming coupon. On the next payment date, you receive the full coupon (even though you didn't own the bond for the entire period). The economics work out fairly: you paid for the portion you didn't earn, then collected the full payment.

Accrued Interest Calculation (The Day Count Matters)

Accrued interest depends on two things: the coupon rate and the day count convention. The formula:

Accrued Interest = (Coupon Payment) x (Days Since Last Coupon / Days in Coupon Period)

The nuance that matters: Different bonds use different day count conventions.

Example: 6% coupon bond, semiannual payments on January 15 and July 15

Settlement date: April 16, 2025 Days since last coupon (30/360): 91 days (3 months + 1 day) Semiannual coupon: $30 per $1,000 face (6% / 2)

Accrued interest = $30 x (91 / 180) = $15.17 per $1,000 face

If clean price is 102.40 (102.40% of par = $1,024.00): Dirty price = $1,024.00 + $15.17 = $1,039.17 settlement amount

The durable lesson: Budget for accrued interest when buying bonds mid-cycle. The cleaner you buy (closer to a coupon payment date, after the payment), the lower your cash outlay (though you wait longer for your first coupon).

Treasury Quote Conventions (The 32nds System)

Treasury quotes look cryptic until you learn the convention. A quote of 99-16 doesn't mean $99.16. It means 99 and 16/32nds percent of par, which equals $995.00 per $1,000 face value.

Why 32nds? The Treasury market is enormous (over $25 trillion outstanding as of 2024). With that volume, price increments need to be small for competitive trading. Quoting in 32nds gives 32 price points per dollar versus 8 points with 1/8th increments (the corporate bond convention). More granularity means tighter spreads and more precise pricing.

Reading Treasury Quotes Step by Step

Quote: 99-16

1. The number before the dash (99) = whole points = 99% of par
2. The number after the dash (16) = 32nds = 16/32 = 0.50% of par
3. Total: 99.50% of par = $995.00 per $1,000 face

Quote: 116-27+

The plus sign (+) adds a 64th (half of a 32nd):

1. Whole points: 116% of par
2. 32nds: 27/32 = 0.84375% of par
3. Plus 1/64th: 1/64 = 0.015625% of par
4. Total: 116.859375% of par = $1,168.59 per $1,000 face

Quick mental math for 32nds:

• Each 32nd = $0.3125 per $1,000 face
• 16/32 = 0.50% = $5.00 per $1,000 face
• A "tick" (1/32) costs about 31 cents per $1,000

The practical point: When you see 99-16, think "99 and a half percent" (because 16/32 = 1/2). When you see 99-08, think "99 and a quarter percent" (because 8/32 = 1/4). The common fractions become second nature.

Format Variations (Same Meaning)

Treasury quotes appear in different formats depending on the data source:

The warning: Decimal notation (99.16) looks like a dollar amount but isn't. The number after the decimal is still 32nds, not cents. This convention catches people who assume standard decimal pricing. When in doubt, check whether you're looking at Treasury data (32nds) or corporate data (actual decimals).

Corporate Bond Quotes (Simpler but Different)

Corporate bonds quote in decimal format with 1/8th increments (0.125 steps). A quote of 102.125 means 102.125% of par = $1,021.25 per $1,000 face value.

Professional convention (spread quoting): Institutional traders often quote corporate bonds as a spread over comparable Treasury yields rather than as a price. A quote of "+175" means the corporate bond yields 175 basis points (1.75%) above the Treasury with similar maturity.

Example: Treasury 10-year yields 4.25%. Corporate bond quoted at +175. Corporate yield = 4.25% + 1.75% = 6.00%. You then calculate price from that yield.

Why this matters for retail investors: If you see professional commentary referencing spread levels, you're seeing relative value language. Tight spreads (low numbers) suggest low perceived credit risk; wide spreads (high numbers) suggest investors want more compensation for default risk.

Settlement Timing (When Money Changes Hands)

As of May 28, 2024, most bond transactions settle T+1 (one business day after trade date). Previously, settlement was T+2. Treasury securities already settled T+1 before this change.

The practical implication: Accrued interest calculates to the settlement date, not the trade date. If you trade on Monday, settlement is Tuesday, and accrued interest runs through Tuesday.

Example:

• Trade date: Monday, December 2, 2024
• Settlement date: Tuesday, December 3, 2024
• Accrued interest calculated through: December 3, 2024

The durable lesson: Check your confirmation for the settlement date and verify the accrued interest calculation. The move to T+1 (from T+2) shortens the window, reducing one day's worth of accrued interest accumulation between trade and settlement.

Common Quote-Reading Mistakes (And Their Costs)

Mistake 1: Reading 99-16 as $99.16

Cost: You think the bond costs $991.60 per 10 bonds when it actually costs $9,950.00 (a 10x error on the calculation, though your broker will charge the correct amount).

The fix: Remember that Treasury quotes show percentage of par in 32nds notation. The dash separates whole percentage points from 32nds, not dollars from cents.

Mistake 2: Forgetting Accrued Interest

Cost: $15-25 per $1,000 face value for a typical mid-cycle purchase (roughly half a semiannual coupon).

The fix: Before buying, estimate accrued interest: (Annual coupon / 2) x (months since last coupon / 6). A 6% coupon bond three months after its last payment has roughly $15 per $1,000 in accrued interest.

Mistake 3: Using Wrong Day Count Convention

Cost: Several dollars per $1,000 face value (less severe but adds up in large positions).

The fix: Use 30/360 for corporate and municipal bonds, actual/actual for Treasuries. FINRA's free accrued interest calculator handles the convention automatically if you're unsure.

Mistake 4: Confusing Coupon Rate with Yield

Cost: Mental confusion rather than direct dollar loss, but it leads to bad comparisons.

The fix: Coupon rate is fixed and determines accrued interest (a 6% coupon always accrues at 6%, regardless of current yield). Yield reflects current price relative to coupon. A 6% coupon bond trading at 95 has a yield above 6%; trading at 105 has a yield below 6%. Accrued interest calculation uses coupon, not yield.

Reading a Complete Bond Quote (Putting It Together)

Treasury example from market data:

What you pay for $100,000 face value:

• Ask price: 98-26 = 98.8125% = $98,812.50
• Plus accrued interest (assume 45 days at 4.625%): $570.31
• Settlement cost: $99,382.81

Corporate example:

What you pay for $50,000 face value:

• Price: 103.25% = $51,625.00
• Plus accrued interest (assume 90 days at 5.50%): $687.50
• Settlement cost: $52,312.50

Detection Signals (How You Know You're Misreading Quotes)

You're likely misreading bond quotes if:

• Your mental price estimate differs from your broker's quote by more than 3%
• You're surprised by the settlement amount on your confirmation
• You think a Treasury at 99-16 is trading at $99.16 (it's $995.00)
• You budget for the clean price and come up short at settlement
• You see accrued interest on your confirmation and don't know why

Checklist: Reading Bond Quotes Correctly

Essential (prevents costly errors)

These four steps prevent 80% of quote-reading errors:

1. Identify bond type first (Treasury = 32nds, corporate = decimals)
2. Convert quote to percentage of par, then to dollars
3. Add accrued interest estimate to budgeted amount
4. Check settlement date to understand when cash is due

High-Impact (for active bond investors)

For systematic price verification:

1. Use FINRA's free TRACE data for price transparency
2. Use FINRA's accrued interest calculator for exact amounts
3. Know the day count convention for your bond type
4. Track bid-ask spread as a transaction cost indicator

Optional (for serious fixed income investors)

If you trade bonds regularly:

1. Learn spread quoting (+bps over Treasury) for relative value
2. Monitor yield vs. price relationship for rate sensitivity
3. Compare your execution to TRACE data for price quality

Next Step (Put This Into Practice)

Pick one bond position you own or are considering. Look up its current quote.

How to verify you're reading it correctly:

1. Identify the bond type (Treasury, corporate, municipal)
2. Convert the quoted price to dollars per $1,000 face
3. Estimate accrued interest using (coupon/2) x (months since payment/6)
4. Add clean price + accrued interest for expected settlement cost
5. Compare your estimate to your broker's quote (should match within $2-3)

Interpretation:

• Match within $2-3: You understand the quote
• Off by $10-30: You likely missed accrued interest
• Off by factor of 10: You misread the 32nds convention

Action: If your estimate doesn't match the broker's quote, identify which component (clean price conversion or accrued interest) caused the gap. That's your learning target.

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References:

Bessembinder, H., Maxwell, W., & Venkataraman, K. (2006). "Market transparency, liquidity externalities, and institutional trading costs in corporate bonds." Journal of Financial Economics, 82(2), 251-288.

Edwards, A., Harris, L., & Piwowar, M. (2007). "Corporate bond market transaction costs and transparency." Journal of Finance, 62(3), 1421-1451.

FINRA. "Trade Reporting and Compliance Engine (TRACE)." FINRA.org, 2002-2024.

SEC. "New T+1 Settlement Cycle - What Investors Need To Know." Investor Bulletin, May 2024.

CME Group. "Calculating U.S. Treasury Pricing." CME Group Education, 2024.

CFA Institute. "Flat, Accrued, & Full Bond Prices." CFA Level 1 Fixed Income Curriculum.