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 sites. This price does not include any interest accrued between the scheduled coupon payments for the bond. The opposite of a clean price is the dirty price.
- 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 sites.
- Dirty price is the price of a bond that includes accrued interest between coupon payments.
Understanding the Clean Price
When quoting prices for bonds, they may be either the clean price or the dirty price. The dirty refers to the price of a bond including accrued interest based upon the coupon rate. If 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 does not. The clean price is quoted more often in the U.S. while the dirty price is quoted more often in Europe.
Bond coupons, or interest payments, are usually paid semiannually, but depending on the issuer you may find bonds paying a yearly, quarterly, or even monthly coupon.
Calculating Clean Prices
Since interest accrues at a steady rate on a bond, calculation of the amount earned can happen on a daily basis. As a result, the dirty price will change daily until the payout, or coupon payment, date. Once the payout is complete, the accrued interest resets to zero. At this point, the dirty and clean prices are the same. The dirty price is sometimes called the price plus accrued.
Bonds are quoted as either a percentage of their par value, or face value, or in dollar terms. For example, if a bond is quoted at 98, this indicates that it is 98% of the bond's par value. Therefore, if 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 does not reflect the accrued interest on the bond. Although bonds are typically quoted in terms of the clean price, investors pay the dirty price unless the bond is purchased on the coupon payment date.
Example of the Clean Price
As an example, let's say Apple Inc. (AAPL) issued a bond with a $1,000 face value while $960 is the published price. The bond pays an interest rate or coupon rate of 4% annually in semiannual payments. As a result, investors would receive $20 every six months for holding the bond.
The clean price is $960 for the bond. However, the bond price would be quoted to investors as $960 plus any accrued interest. The broker determines the daily per diem of interest that's accumulated and adds that amount to the clean price. The all-in price or dirty price would vary depending on how many days since the last coupon payment. Interest accumulates immediately following the last coupon payment.
Let's look at two scenarios using our Apple example.
- If the investor bought the bond a day before the first coupon payment of $20 it results in approximately $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.
- If the investor purchased the bond on the coupon payment date whereby the interest payment was just made, $960 or the clean price, would be the dirty price for the bond.
Immediately following the coupon payment, the bond's price resets to the clean price whereby the dirty price and clean price are equal. Shortly afterward, the bond begins accruing interest again until the next coupon payment.