Clean Price Vs Dirty Price: What’s the Difference?

Follow us on LinkedIn

The price of a bond is a crucial metric for investors to consider when making decisions about their investment. It represents the amount at which the bond gets bought or sold. However, it is not as straightforward to determine this price. Several factors play a role in establishing the bond price. One of these includes interest rates, interest payments, and accrued interest.

When purchasing bonds, companies may come across different prices. Each may represent aspects of the bond and its valuation. Two of these include the clean and dirty price. Before discussing the differences, it is crucial to understand what each is.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

What is the Clean Price of a bond?

Bonds come with a face value (or par value), the amount the issuer repays for the bond at maturity. It also comes with a coupon rate, which represents the percentage of interest the holder receives on the face value. This interest accrues on the bond over time. The clean price of the bond is its value without the impact of the accrued interest.

The clean price of a bond is also its quoted price in the market. Market facts can impact this price, causing it to fluctuate over time. Usually, these factors include interest rates, economic conditions, and the issuer’s creditworthiness. The clean price is also the amount the buyer pays to purchase the underlying bond. The difference between this price and the face value is the accrued interest on the bond.

What is the Dirty Price of a bond?

The dirty price of a bond is the amount that factors in its accrued interest and its clean price. Usually, it includes the coupon that the instrument has accumulated since its last coupon payment date. The dirty price of the bond is relevant when it gets traded between interest payment dates. Since the bond gains coupon payments on those dates, the buyer must pay the dirty price of the bond.

The dirty price of the bond also represents its purchase price. However, it only applies when there is accrued interest on that bond. This price is lower than the bond’s clean price but still requires the latter for calculation. The formula for the dirty price of a bond is as follows.

Dirty price = Clean price + Accrued interest

Clean Price vs Dirty Price: What’s the difference?

The primary difference between the clean and dirty prices of a bond comes from accrued interest. As mentioned above, the former value does not consider this interest when determining the bond’s price. On the other hand, a dirty price requires a clean price and the interest accrued to evaluate the bond. The clean price represents the principal amount of the bond, while the dirty price is what investors pay for it.

Another difference between them also relates to the interest accrued. In the market, the clean price of the bond is the quoted price between investors and brokers. It is the value the bond receives at the next interest payment. On the other hand, the dirty price represents the bond’s current value in the market. It is the value of that bond between interest payment dates.

Conclusion

The price of a bond may differ based on various factors. One of these differentiations comes from whether it comes with accrued interest. If the price does not consider this interest, it is called the bond’s clean price. However, if the bond’s price includes the clean price and accrued interest, it is called the dirty price.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSGolconda Gold Ltd. Releases Financial and Operating Results for 2023
Golconda Gold Ltd. Releases Financial and Operating Results for 2023

TORONTO, April 29, 2024 (GLOBE NEWSWIRE) — Golconda Gold Ltd. (“Golconda Gold” or the “Company”) (TSX-V: GG; OTCQB: GGGOF) is pleased to announce the release of its financial results for the year ended December 31, 2023. All amounts are in United States dollars unless otherwise…

Stay up-to-date with the latest news - click here
LATEST NEWSFirst Nation Takes Fight With Oil-Sands Giant to Shareholders
First Nation Takes Fight With Oil-Sands Giant to Shareholders

An indigenous community in Alberta’s oil-sands region submitted a proposal to Imperial Oil Ltd. shareholders that would require the company to disclose the financial effect of the energy transition.

Stay up-to-date with the latest news - click here
LATEST NEWSSHARC Energy Announces 2023 Year End Financial Results
SHARC Energy Announces 2023 Year End Financial Results
Stay up-to-date with the latest news - click here
LATEST NEWSCohen & Steers Infrastructure Fund, Inc. (UTF) Notification of Sources of Distribution Under Section 19(a)
Cohen & Steers Infrastructure Fund, Inc. (UTF) Notification of Sources of Distribution Under Section 19(a)
Stay up-to-date with the latest news - click here
LATEST NEWSCohen & Steers Total Return Realty Fund, Inc. (RFI) Notification of Sources of Distribution Under Section 19(a)
Cohen & Steers Total Return Realty Fund, Inc. (RFI) Notification of Sources of Distribution Under Section 19(a)
Stay up-to-date with the latest news - click here

Leave a Reply