Bond investors often receive fixed interest payments called coupons. Coupon payments are paid on a regular schedule. They’re most often paid semiannually, although some bonds offer annual, quarterly, or even monthly payments. Clean price is the quoted price of a bond. It fluctuates with changes in economic conditions, interest rates or even a change in the issuer’s creditworthiness.
How Clean Price Works
Bonds are frequently issued at a face value of $1,000. Bond prices are typically quoted as a percentage of face value. For example, if Company XYZ issued a bond with a $1,000 face value and it’s quoted at 95, it has a market value of $950. The clean price of the bond is $950. If Company XYZ pays a 6% coupon paid semiannually, the clean price of the bond is still $950. “Market price” is another term for a bond’s clean price. Clean price is also used to calculate the dirty price. The dirty price is the price of the bond that factors in the interest that’s accumulated. Dirty price = Clean price + Accrued interest Suppose Company XYZ makes its coupon payments on Jan. 1 and July 1 each year. In the U.S., corporate bonds typically follow a 30/360 day-count convention, which means bond interest is calculated as accruing over 30 days in a month and 360 days in a year. Accrued interest is calculated as follows: Accrued interest = FV x C/P x D/T FV: Face value C: Coupon rate P: Number of coupon payments per year D: Days since the last coupon payment was made T: Days between payments, or accrual period If you wanted to calculate the dirty price as of April 1, you’d first need to calculate accrued interest using the formula above. Despite fewer days in February, since the convention is to follow 30/360, you’d use 90 (30 x 3) for “D.” You’d use 180 (i.e., 360 divided by two) for “T,” or days between coupon payments, even though the coupon is semiannual and there are 365 days in a year. Accrued interest = $1,000 x 0.06/2 x 90/180 = $15 Dirty price = $950 clean price + $15 accrued interest = $965
Clean Price vs. Dirty Price
Clean price and dirty price of a bond differ not only in how they are calculated. Because it depends on accrued interest, dirty price changes every day, while clean moves with bond market fluctuations. The dirty price will be highest right before the coupon payment is made. Once this occurs, the clean price and dirty price will be equal. Then the dirty price will begin to increase again as interest begins to accrue.
