calledges.com 
Clean price represents a bond's price excluding any accrued interest since the last coupon payment, reflecting its pure market value. Dirty price includes the accrued interest, showing the total amount a buyer pays, combining the clean price and interest earned but not yet paid. Explore more to understand how these pricing methods impact bond trading and investment strategies.
Main Difference
Clean price refers to the quoted price of a bond excluding any accrued interest, representing the bond's intrinsic value based on market conditions. Dirty price includes the clean price plus accrued interest since the last coupon payment, reflecting the total amount a buyer pays. Bond traders use clean price for quoting and dirty price for transaction settlements, ensuring accurate compensation for interest earned. The distinction is crucial for precise bond valuation and trading efficiency in fixed income markets.
Connection
Clean price represents the bond's value excluding accrued interest, whereas dirty price includes accrued interest, reflecting the total amount payable by the buyer. The dirty price equals the clean price plus the interest accumulated since the last coupon payment date. This relationship ensures accurate valuation and transaction pricing between bondholders and buyers in the fixed income market.
Comparison Table
| Aspect | Clean Price | Dirty Price |
|---|---|---|
| Definition | The price of a bond excluding any accrued interest. | The total price of a bond including accrued interest since the last coupon payment. |
| Includes Accrued Interest | No | Yes |
| Purpose | Used to compare bond prices without the effect of accrued interest. | Represents the actual amount paid by the buyer to the seller. |
| Usage | Commonly quoted in financial markets and price listings. | Used in actual transaction settlements and payments. |
| Calculation | Clean Price = Dirty Price - Accrued Interest | Dirty Price = Clean Price + Accrued Interest |
| Example | A bond quoted at 99.5 means the bond price excluding accrued interest is 99.5% of par value. | The buyer pays 99.5% + accrued interest to the seller at settlement. |
Accrued Interest
Accrued interest represents the interest expense or income that has accumulated on a financial instrument, such as bonds or loans, since the last interest payment date but has not yet been paid or received. It is calculated based on the principal amount, the interest rate, and the time elapsed within the interest period. In accounting, accrued interest is recorded as a receivable or payable to accurately reflect the earning or obligation in financial statements. This concept ensures that interest income and expenses are matched to the correct accounting periods under the accrual basis of accounting.
Bond Valuation
Bond valuation involves determining the present value of a bond's expected future cash flows, including periodic coupon payments and the face value at maturity. The valuation depends on the bond's coupon rate, time to maturity, and the prevailing market interest rates. Accurate bond valuation helps investors assess the fair price of bonds and make informed investment decisions. Techniques such as discounted cash flow (DCF) analysis and yield to maturity (YTM) calculations are essential tools in this process.
Settlement Date
Settlement date in finance refers to the specified day on which a trade or transaction is finalized, meaning the transfer of securities and payment is completed between the buyer and seller. For stocks traded on major US exchanges, the settlement date typically occurs two business days after the trade date, known as T+2. This timeframe allows for the necessary administrative processes, including clearing and recording ownership changes. Accurate knowledge of settlement dates is crucial for managing cash flow, margin requirements, and avoiding trade disputes.
Coupon Payment
Coupon payment refers to the periodic interest payment made by a bond issuer to bondholders, typically expressed as a percentage of the bond's face value. This fixed or floating payment compensates investors for lending their funds and is usually paid semiannually or annually. The coupon rate directly impacts the bond's yield and market price, influencing investor demand and overall bond valuation. In financial markets, understanding coupon payments is crucial for assessing bond income streams and investment returns.
Quoted Price
Quoted price in finance refers to the latest bid or ask price at which a security, commodity, or asset can be bought or sold in the market. It is determined by real-time supply and demand dynamics on trading platforms such as stock exchanges or over-the-counter markets. The quoted price reflects current market conditions and is essential for investors to make informed decisions regarding entry or exit points. Financial tools like limit orders and market orders rely heavily on accurate quoted price data for execution.
Source and External Links
Dirty vs Clean Price - Financial Edge Training - The clean price of a bond excludes accrued interest and is typically quoted in most markets, while the dirty price includes accrued interest and is the actual amount paid by the buyer.
Clean Price of Bonds: Calculation Method and Key Differences - The clean price reflects the bond's value excluding accrued interest and is used for standardized market quotations, whereas the dirty price is the clean price plus accrued interest and represents the total payment required from the buyer.
Dirty price - Wikipedia - The dirty price is the present value of a bond's future cash flows including accrued interest since the last coupon, while the clean price excludes this accrued interest, simplifying price comparisons in financial markets.
FAQs
What is a bond’s clean price?
A bond's clean price is its quoted price excluding accrued interest.
How does clean price differ from dirty price?
Clean price excludes accrued interest on a bond, while dirty price includes accrued interest.
What is included in a bond’s dirty price?
A bond's dirty price includes its clean price plus the accrued interest since the last coupon payment.
Why do bonds have both clean and dirty prices?
Bonds have clean and dirty prices because the clean price excludes accrued interest for clarity in market quotation, while the dirty price includes accrued interest to reflect the actual amount payable by the buyer on settlement.
How is accrued interest calculated for bonds?
Accrued interest for bonds is calculated by multiplying the bond's face value by the coupon rate, then by the fraction of the coupon period that has elapsed since the last interest payment.
Which price is quoted in bond markets?
Bond markets quote prices as a percentage of the bond's face value, typically expressed per 100 units of principal.
When do investors pay the dirty price?
Investors pay the dirty price when purchasing bonds, which includes the bond's clean price plus any accrued interest since the last coupon payment.