What is the Dirty Price
A dirty price is a bond pricing quote referring to the price of a coupon bond that includes the present value of all future cash flows, including interest accruing on the next coupon payment. The dirty price is how the bond is quoted in most European markets, and it is the price an investor pays to acquire the bond.
BREAKING DOWN Dirty Price
Accrued interest is earned when a coupon bond is currently in between coupon payment dates. As the next coupon payment date approaches, the accrued interest increases until the coupon is paid. Immediately following the coupon payment, the clean price and dirty price will be equal.
The dirty price is sometimes called the price plus accrued. The clean price is quoted more often in the United States.
The dirty price allows a seller to compensate for the fact that known accrued interest payments will be redirected to the buyer. This helps the seller get as much as possible out of the investment prior to releasing it to the buyer, and it provides flexibility in regards to the exact date of the sale. Otherwise, buyers may learn to time to purchase to gather the largest amount of accrued interest, essentially short-changing the seller, which could lead sellers to limit the days the bond could be for sale.
Since interest accrues at a steady rate on a bond, the amount earned can be calculated on a daily basis. This means that the dirty price will change daily until the payout, or coupon payment, date. Once the payout is complete, and the accrued interest resets to zero, the dirty and clean price are the same.
In the case of bonds offering semi-annual payments, the dirty price would rise slightly higher every day over the course of six months. Once the six-month mark is hit and the coupon payment is made, the accrued interest resets to zero to begin the cycle again. This continues until the bond reaches maturity.
Dirty Versus Clean Pricing
The dirty price is generally quoted between brokers and investors, which is common in some markets. The clean price, or the price of the bond without accounting for accrued interest, is often considered the published price. This may be the amount that would be recorded in a newspaper or another financial resource used for price tracking, and it is often considered to reflect the value of the bond within the current marketplace. The clean price may also be known as the flat price.