Trading Flat and Defaulted Bond Conventions

Ordinarily a bond buyer pays the quoted "clean" price plus accrued interest since the last coupon date — compensating the seller for the coupon they've earned but not yet been paid. That mechanism assumes the next coupon will actually arrive on schedule. When an issuer defaults, or is expected to miss a coupon, the bond switches to trading "flat": the buyer pays just the quoted price with no accrued interest added, because there's no reliable coupon stream left to accrue against. Whichever party ends up holding the bond when a coupon (if any) is eventually paid gets that payment, rather than it being split by ownership period the way accrued interest normally handles it.

Distressed-debt traders treat "trades flat" as a standing signal in itself: a bond's inclusion on the flat-trading list (maintained by exchanges and self-regulatory bodies) usually follows a missed payment or a bankruptcy filing, and it changes how the bond's price is quoted and compared to peers, since two "flat" bonds with different remaining coupon histories aren't directly comparable on price alone.