Clean Price

What Is the Clean Price?

The clean price is the price of a coupon bond not including accrued interest payments. The clean price is typically the quoted price on financial news destinations. This price includes no interest accrued between the scheduled coupon payments for the bond. Something contrary to a clean price is the dirty price.

Understanding the Clean Price

While quoting prices for bonds, they might be either the clean price or the dirty price. The dirty alludes to the price of a bond including accrued interest in view of the coupon rate. On the off chance that a bond quotes between coupon payment dates, the accrued interest up to that day is reflected in the price.

In short, a dirty bond price includes accrued interest while a clean price doesn't. The clean price is quoted all the more frequently in the U.S. while the dirty price is quoted all the more frequently in Europe.

Bond coupons, or interest payments, are usually paid semiannually, yet depending on the issuer you might find bonds paying a yearly, quarterly, or even month to month coupon.

Calculating Clean Prices

Since interest builds at a consistent rate on a bond, calculation of the amount earned can occur consistently. Subsequently, the dirty price will change daily until the payout, or coupon payment, date. Once the payout is complete, the accrued interest resets to zero. Right now, the dirty and clean prices are something very similar. The dirty price is now and again called the price plus accrued.

Bonds are quoted as either a percentage of their par value, or face value, or in dollar terms. For instance, assuming a bond is quoted at 98, this indicates that it is 98% of the bond's par value. Consequently, assuming the bond's par value is $1,000, the bond price is $980. The $980 price quote is the clean price of the bond since it doesn't mirror the accrued interest on the bond. Despite the fact that bonds are typically quoted in terms of the clean price, investors pay the dirty price except if the bond is purchased on the coupon payment date.

Illustration of the Clean Price

For instance, suppose Apple Inc. (AAPL) issued a bond with a $1,000 face value while $960 is the distributed price. The bond pays an interest rate or coupon rate of 4% annually in semiannual payments. Accordingly, investors would receive $20 at regular intervals for holding the bond.

The clean price is $960 for the bond. Nonetheless, the bond price would be quoted to investors as $960 plus any accrued interest. The broker determines the daily routine set of expenses of interest that is accumulated and adds that amount to the clean price. The all-in price or dirty price would change depending on how long since the last coupon payment. Interest aggregates promptly following the last coupon payment.

How about we take a gander at two situations using our Apple model.

• On the off chance that the investor bought the bond a day before the primary coupon payment of $20 it results in roughly $19.90 of accrued interest up to that date. The investor's bond price would be $979.90, or $960 plus $19.90 in accrued interest.
• Assuming the investor purchased the bond on the coupon payment date by which the interest payment was just made, $960 or the clean price, would be the dirty price for the bond.

Quickly following the coupon payment, the bond's price resets to the clean price by which the dirty price and clean price are equivalent. Shortly subsequently, the bond begins accruing interest again until the next coupon payment.

Features

• Dirty price is the price of a bond that includes accrued interest between coupon payments.
• The clean price is the price of a coupon bond not including any accrued interest. That is, it doesn't include the accrued interest between coupon payments.
• The clean price is typically the quoted price on financial news destinations.