Clean price is the price of the bond without factoring in the interest accrued between coupon payments. When you see a bond price quoted on a financial news website, you typically see the clean price. However, because bond investors rely on interest payments, the clean price excludes important information.
Definition of Clean Price
The clean price is the price of a bond that doesn’t reflect any interest that’s accrued.
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.
If a bond trades below its face value, also known as its par value, it’s said to trade as a discount. A bond trading above its par value is trading at a premium.
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.
|Clean price||Dirty price|
|Clean price = Quoted percentage of face value||Dirty price = Clean price + interest accrued|
|Fluctuates with interest rates and bond market conditions||Changes each day that interest accrues|
|Usually the quoted price||Represents true market value|
|Used to compare different bonds||Used to determine total cost of a bond|
What It Means for Individual Investors
Investors commonly use the clean price as a benchmark to compare other bonds. A change in yield for dirty price is not impacted by change in accrued interest, making it a better vehicle for comparison. The dirty price is used to calculate the anticipated return from buying or selling a particular bond.
The clean price will always be equal to or lower than the dirty price. Both prices will be the same the day a coupon payment is made, but the dirty price increases every day that interest accrues.
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.
- The clean price of a bond is the price of a bond before accounting for accrued interest. It’s typically quoted in financial publications.
- A bond’s clean price fluctuates with interest rates and other bond market conditions.
- Clean price plus accrued interest equal a bond’s dirty price.
- The clean price is commonly used as a benchmark for comparing bonds.
M. Choudhry, D. Joannas, G. Landuyt, R. Pereira and R. Pienaar. "Capital Market Instruments Analysis and Valuation," Third Edition, Page 74. Palgrave Macmillan UK, 2010.
FINRA. "Bond Basics."
M. Choudhry, D. Joannas, G. Landuyt, R. Pereira and R. Pienaar. "Capital Market Instruments Analysis and Valuation," Third Edition, Page 74-76. Palgrave Macmillan UK, 2010.
Parameswaran, Sunil. "Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives." Page 182. Singapore: Wiley, 2011.