The dirty price of a bond represents the value of a bond, exclusive of any commissions or fees. The dirty price is also called the "full price."

Contents 1 Bond Pricing 2 Example 3 Footnotes 4 References 5 See also

[edit] Bond Pricing

Bonds, as well as a variety of other fixed income securities, provide for coupon payments to be made to bond holders on a fixed schedule. The dirty price of a bond will decrease on the days coupons are paid, resulting in a saw-tooth pattern for the bond value^[1]. This is because there will be one less future cash flow (i.e., the coupon payment just received) at that point.

To separate out the effect of the coupon payments, the accrued interest between coupon dates is subtracted from the value determined by the dirty price to arrive at the clean price^[2]. The accrued interest is based on the day count convention, coupon rate, and number of days from the preceding coupon payment date^[3].

The clean price more closely reflects changes in value due to issuer risk and changes in the structure of interest rates. Its graph is smoother than that of the dirty price. Use of the clean price also serves to differentiate interest income (based on the coupon rate) from trading profit and loss.

It is market practice to quote bonds on a clean-price basis. When a bond settles the accrued interest is added to the value based on the clean price to reflect the full market value.

[edit] Example

A US bond has a coupon rate of 7.2% and pays 4 times a year, on the 15th of January, April, July, and October. It uses the 30/360 US day count convention.

A trade for 1,000 par value of the bond settles on January 25th. The prior coupon date was January 15th. The accrued interest reflects ten days' interest, or $2.00 (7.2% of 1,000 * (10 days/360 days)).

The full value of these bonds is set by the market at $985.50. The following table illustrate the values of these terms.

The market convention for bond prices assigns a dirty price of 98.55 to the trade, not 0.9855. This is sometimes referred to as the price for 100 par value.

Bond Pricing Example

Term	Value
Par value	1,000.00
Full market value	$985.50
Dirty price	98.55
Accrued interest	$2.00
Flat market value	$983.50
Clean price	98.35

[edit] Footnotes

1. ^ see the figure in Bond Accrued Interest.
2. ^ see Clean and Dirty Prices.
3. ^ see Trade Interest Bought/Sold.

[edit] References

• Bond Accrued Interest, 2008, http://www.riskglossary.com/link/bond_accrued_interest.htm, retrieved 2008-07-06 . Discussion of dirty price, clean price, and accrued interest, including diagrams illustrating the relationships.

• Coupon Interest, 2008, http://www.eclipsesoftware.biz/CouponInterest.html, retrieved 2008-07-06 . Discussion of coupon interest, including trade interest figuration.

• Bond Pricing in the Market, 2008, http://www.eclipsesoftware.biz/BondPricing.html, retrieved 2008-07-06 . Explanation of how bonds are priced, including valuation, coupon interest, and clean and dirty pricing, with diagrams.

[edit] See also

• Bond
• Bond valuation
• Clean price
• Accrued interest
• Day count convention

v • d • e Bond market Bond · Debenture · Fixed income Types of bonds by issuer Agency bond · Corporate bond (Senior debt, Subordinated debt) · Distressed debt · Emerging market debt · Government bond · Municipal bond · Sovereign bond Types of bonds by payout Accrual bond · Auction rate security · Callable bond · Commercial paper · Convertible bond · Exchangeable bond · Fixed rate bond · Floating rate note · High-yield debt · Inflation-indexed bond · Inverse floating rate note · Perpetual bond · Puttable bond · Reverse convertible · Zero-coupon bond Bond valuation Clean price  · Convexity  · Coupon yield  · Credit spread  · Current yield  · Dirty price  · Duration  · Nominal yield  · Yield to maturity Securitized products Asset-backed security · Collateralized debt obligation · Collateralized mortgage obligation · Commercial mortgage-backed security · Mortgage-backed security  · Yield-curve spread Bond options Callable bond  · Convertible bond  · Embedded option  · Exchangeable bond  · Option-adjusted spread  · Puttable bond  · Z-spread Institutions Commercial Mortgage Securities Association (CMSA) · International Capital Market Association (ICMA) · Securities Industry and Financial Markets Association (SIFMA)