What Is Dirty Price?
Let me explain what a dirty price is in the world of bonds. It's essentially the total cost you'll pay for a bond, which includes the quoted price plus any accrued interest since the last coupon payment. When you're looking at bond quotes between those payment dates, they factor in the interest that's built up right up to the quote day.
To put it simply, if you're dealing with a dirty bond price, it has that accrued interest baked in, whereas a clean price strips it out.
Key Takeaways
Here's what you need to remember: A dirty price bundles in the accrued interest along with the bond's coupon payment. If a bond is quoted between coupon dates, that price includes interest up to the quote day. Again, dirty means with accrued interest, clean means without. In the US, we typically see clean quotes, but in Europe, dirty quotes are the norm.
Understanding Dirty Price
Accrued interest kicks in when a coupon bond is between payment dates. As the next payment approaches, that interest grows each day until the coupon is paid out. On the actual payment day, the clean and dirty prices match because there's no accrued interest yet for the next period.
You might hear the dirty price called the 'price plus accrued.' In the US, we quote clean prices more often, but in Europe, dirty is standard. This dirty price helps sellers figure out the real cost of the bond, accounting for interest accrued since the last payment. So, when you sell on a certain date, it's the clean price plus daily accrued interest, meaning the buyer pays more than what's quoted on financial sites due to that interest and any broker fees.
Accrued Interest
Interest on a bond builds steadily, calculated daily. That's why the dirty price shifts every day until the coupon payment, when it resets to zero and matches the clean price again.
For bonds with semiannual payments, the dirty price inches up daily over six months. Once that payment hits, accrued interest zeros out, and the cycle restarts. This continues until the bond matures.
Dirty Vs. Clean Pricing
Between brokers and investors, you'll often hear dirty prices quoted, but the clean price—without accrued interest—is what's usually published. That's the flat bond price you see in newspapers or tracking resources. Even though dirty includes the interest, the clean price is often viewed as the bond's current market value.
Real-World Example of a Dirty Price
Take Apple Inc. issuing a bond with a $1,000 face value, but the published price is $960. It pays a 4% annual coupon rate, semiannually, so holders get $20 every six months.
That $960 is the clean price. But if you're buying, your broker quotes $960 plus accrued interest, calculated daily—no commission in this case. The amount depends on the purchase day.
Say you buy one day before the $20 coupon payment; there's $19 in accrued interest. Your total dirty price is $979: $960 plus $19.
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