The Real Price of Bonds: Understanding Clean and Dirty Pricing

Newsletter #48

When trading bonds, the price quoted on the exchange isn’t always the price you pay.
That’s because bonds have two separate prices:

• Clean price – the quoted market price, excluding any interest that’s built up since the last coupon payment.

• Dirty price – the actual price you pay, which includes that accrued interest.

Let’s dive into this.

💰Clean Price: What’s Quoted On Exchanges

The clean price is the price that you’ll see quoted on exchanges or trading platforms. It reflects the market value of the bond excluding any interest that has built up since the last coupon payment.

For this example, let’s suppose we have a bond that is trading at $95 on the exchange. This $95 is the clean price of the bond.

⏳ Accrued Interest: What’s Been Earned So Far

Most bonds pay coupons semi-annually, which means they build up interest every day, but only pay out coupons twice a year.

So when you buy a bond between coupon dates, the seller is entitled to the interest that’s been “earned” during the time they held the bond since the last payment. That’s called accrued interest — and you, the buyer, have to pay them for that.

Suppose in our example our bond pays a 5% annual coupon:

• Coupons are paid semi-annually, so a coupon of $2.5 is paid out every six months.

• If you buy the bond 60 days after the last coupon was paid, and there are 180 days in the coupon period, the seller is owed 60/180 of $2.5, or $0.83 in accrued interest.

💰 The Dirty Price: What You Actually Pay

The dirty price is what you actually pay when buying the bond. The formula is as follows:

Dirty price = Clean price + Accrued interest

So continuing our example:

• Clean price = $95

• Accrued interest = $0.83

• Dirty price (total paid) = $95.83

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