To understand dirty price & clean price it’s important first to understand how bonds work. Like other fixed-income assets, bonds provide a coupon payment to the bondholder on a fixed schedule. Coupon payments can occur monthly, quarterly, or annually. However, most bonds make coupon payments on a semi-annual basis (every six months).
A bond is priced based on the present value of its future cash flows. Once a coupon payment has been made, there will be no further payments until the next payment date. The interest that accrues between each payment date is known as the accrued interest. On the payment date, the accrued interest resets back to zero again.
A dirty price includes accrued interest along with a bond’s coupon payment.. whereas The clean price is the price of a coupon bond not including accrued interest payments.. And typically the quoted price on financial news sites both are part of bond that is fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental)
The formula to calculate
Dirty Price = Clean Price + Accrued Interest
Clean Price = Dirty Price – Accrued Interest
Clean vs. Dirty Prices
Example
Today is April 1. Suppose you want to buy a
bond with a 8% annual coupon payable on
January 1 and July 1
• The bond is currently quoted at $1,020
The Clean price = the quoted price = $1,020
• The Dirty or Invoice price = $1,020 plus
(3mo/6mo)*$40 = $1,040
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