Clean Price

Understanding Clean Price vs. Dirty Price in Bond Investing

When delving into the world of bond investing, understanding the distinction between clean price and dirty price is crucial. These terms may sound straightforward, but their implications can significantly impact investment decisions. Let's explore what clean price means, how it differs from dirty price, and why it matters to investors.

Clean Price: A Primer

The clean price of a bond refers to its price without factoring in any accrued interest payments. Essentially, it represents the flat price of the bond itself, excluding any interest that has accumulated between scheduled coupon payments. Typically, financial news sites quote clean prices when reporting bond prices.

Key Differences: Clean vs. Dirty Price

The clean price of a bond is what investors usually see when checking bond prices. It's the base price of the bond without any additional accrued interest. On the other hand, the dirty price encompasses both the base price of the bond and any accrued interest between coupon payments.

Calculating Clean Prices

Determining the clean price of a bond involves straightforward calculations. Since interest accrues steadily on a bond, the dirty price fluctuates daily until the coupon payment date. Once the coupon payment is made, the accrued interest resets to zero, and the dirty price equals the clean price.

Example Scenarios

Let's consider an example using a bond issued by Apple Inc. Suppose the bond has a face value of $1,000 and a clean price of $960. If an investor purchases the bond a day before the coupon payment, the accrued interest would be added to the clean price, resulting in a higher dirty price. However, if the bond is bought on the coupon payment date, the clean price remains unchanged as it transitions to the dirty price.

Conclusion