What does the term “trading flat” typically refer to in bond markets?

The term "trading flat" refers specifically to bonds that are bought and sold without the inclusion of accrued interest. This situation typically occurs with zero-coupon bonds or when the bond is in distress or has defaulted. When bonds are traded flat, they do not have any interest that needs to be accounted for in the price at which they trade, making the trading price solely a reflection of the bond’s principal value.

In contrast, other terms like trading at a premium or discount pertain to the bond’s relationship to its par value, which does not fit the definition of "trading flat." The focus on the absence of accrued interest is key to understanding this term, as it illustrates how pricing for this type of bond operates differently from standard coupon-paying bonds that typically involve interest calculations in their market value.