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Sometimes referred to as firm-fixed pricing or a clean price, a flat price is the basic price of a security without applying any interest that has been generated by the asset. The term is often associated with the pricing of a bond issue, and serves as a means of identifying just what aspect of the value of the bond is under discussion. Sometimes considered to be a more stable indicator of the overall value of the security, investors look closely at the flat price when determining if purchasing the bond issue is a good idea.
The flat price is often contrasted with what is known as the dirty price. Dirty prices are simply the value of bonds that incorporate any interest accrued as well as the actual price of the bonds themselves. Comparing the two figures is a helpful way to quickly determine what type of return a given bond has generated, taking into account either any interest that has already been paid as a recent coupon payment, or that has accumulated up to that point in the bond’s maturity.
One of the reasons that looking at the flat price is considered such a good idea is that factors can affect the amount of return that can reasonably be expected from the bond issue. This is particularly true in cases where the return is based on a fluctuating interest rate, or where there is a strong possibility of the bond being called early. By looking closely at the bond price itself, it is easier to make projections on what will happen moving forward, and decide if the investment is worth the time and effort necessary to acquire the bond issue.
In general, when the price of bonds are quoted in various types of market publications, it is the flat price that is quoted. This makes it much easier for investors to compare the relative potential of different bond issues, since the quoted price is based on a factor that is not subject to change. Using this figure as a basis for consideration, the investor can look into such matters as the amount of time remaining until maturity, and investigate the history of the bond issue in terms of what return has been generated up to that point. The investor will also consider market conditions that may affect the future return of the investment between today and the maturity date.
Outside of investing circles, the term is sometimes used to identify the lowest price that an owner is willing to consider as part of the sale of an asset. For example, someone selling a house may decide to set an asking price of $200,000 in US dollars for a home, but have a flat price of $180,000 USD that would be acceptable. In this particular application, the flat price is not advertised, and often remains as a bit of information that is only shared between the realtor and the owner of the property.
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