What does it mean if a bond is trading flat?

When a bond is said to be trading flat, it means that the price of the bond does not include any accrued interest. In the bond market, accrued interest is the interest that has accumulated since the last coupon payment was made; bonds typically trade on a clean price basis, which is the price excluding accrued interest, or a dirty price, which includes accrued interest. When a bond trades flat, it signifies that it is considered more like an asset whose price is only based on its cash flows rather than the interest that accumulates over time.

This situation is common with zero-coupon bonds or during certain market conditions when there may not be any coupons to account for. Consequently, the pricing mechanism reflects only the bond's intrinsic value and not the additional interest that would normally be incorporated into its price. Understanding this concept is vital for investors when evaluating bond investments and pricing.