Dirty price
Encyclopedia
The dirty price of a bond
represents the value of a bond, exclusive of any commissions or fees. The dirty price is also called the "full price" or the "all in price."
To separate out the effect of the coupon payments, the accrued interest
between coupon dates is subtracted from the value determined by the dirty price to arrive at the clean price
. The accrued interest
is based on the day count convention
, coupon rate, and number of days from the preceding coupon payment date.
The clean price more closely reflects changes in value due to issuer risk and changes in the structure of interest rates. Its graph is smoother than that of the dirty price. Use of the clean price also serves to differentiate interest income (based on the coupon rate) from trading profit and loss.
It is market practice in US to quote bonds on a clean-price basis. When a bond settles the accrued interest is added to the value based on the clean price to reflect the full market value.
.
A trade for 1,000 par value
of the bond settles on January 25. The prior coupon date was January 15. The accrued interest
reflects ten days' interest, or $2.00 (7.2% of 1,000 * (10 days/360 days)).
The full value of these bonds is set by the market at $985.50. The following table illustrates the values of these terms.
The market convention for bond prices assigns a dirty price of 98.55 to the trade, not 0.9855. This is sometimes referred to as the price for 100 par value.
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
represents the value of a bond, exclusive of any commissions or fees. The dirty price is also called the "full price" or the "all in price."
Bond Pricing
Bonds, as well as a variety of other fixed income securities, provide for coupon payments to be made to bond holders on a fixed schedule. The dirty price of a bond will decrease on the days coupons are paid, resulting in a saw-tooth pattern for the bond value. This is because there will be one fewer future cash flow (i.e., the coupon payment just received) at that point.To separate out the effect of the coupon payments, the accrued interest
Accrued interest
In finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals...
between coupon dates is subtracted from the value determined by the dirty price to arrive at the clean price
Clean price
In finance, the clean price is the price of a bond excluding any interest that has accrued since issue or the most recent coupon payment. This is to be compared with the dirty price, which is the price of a bond including the accrued interest....
. The accrued interest
Accrued interest
In finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals...
is based on the day count convention
Day count convention
In finance, a day count convention determines how interest accrues over time for a variety of investments, including bonds, notes, loans, mortgages, medium-term notes, swaps, and forward rate agreements . This determines the amount transferred on interest payment dates, and also the calculation of...
, coupon rate, and number of days from the preceding coupon payment date.
The clean price more closely reflects changes in value due to issuer risk and changes in the structure of interest rates. Its graph is smoother than that of the dirty price. Use of the clean price also serves to differentiate interest income (based on the coupon rate) from trading profit and loss.
It is market practice in US to quote bonds on a clean-price basis. When a bond settles the accrued interest is added to the value based on the clean price to reflect the full market value.
Example
A corporate bond has a coupon rate of 7.2% and pays 4 times a year, on the 15th of January, April, July, and October. It uses the 30/360 US day count conventionDay count convention
In finance, a day count convention determines how interest accrues over time for a variety of investments, including bonds, notes, loans, mortgages, medium-term notes, swaps, and forward rate agreements . This determines the amount transferred on interest payment dates, and also the calculation of...
.
A trade for 1,000 par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
of the bond settles on January 25. The prior coupon date was January 15. The accrued interest
Accrued interest
In finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals...
reflects ten days' interest, or $2.00 (7.2% of 1,000 * (10 days/360 days)).
The full value of these bonds is set by the market at $985.50. The following table illustrates the values of these terms.
The market convention for bond prices assigns a dirty price of 98.55 to the trade, not 0.9855. This is sometimes referred to as the price for 100 par value.
| Term | Value |
|---|---|
| Par value | 1,000.00 |
| Full market value | $985.50 |
| Dirty price | 98.55 |
| Accrued interest | $2.00 |
| Flat market value | $983.50 |
| Clean price | 98.35 |
See also
- Bond valuationBond valuationBond valuation is the determination of the fair price of a bond. As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bond's expected...
- Clean priceClean priceIn finance, the clean price is the price of a bond excluding any interest that has accrued since issue or the most recent coupon payment. This is to be compared with the dirty price, which is the price of a bond including the accrued interest....
- Accrued interestAccrued interestIn finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals...
- Day count conventionDay count conventionIn finance, a day count convention determines how interest accrues over time for a variety of investments, including bonds, notes, loans, mortgages, medium-term notes, swaps, and forward rate agreements . This determines the amount transferred on interest payment dates, and also the calculation of...