Clean Price vs Dirty Price in Bonds: Differences Explained

If you invest in bonds you will often see two prices for the same security. Traders talk about a clean price while the contract note settles on a dirty price. The terms may sound technical yet the idea is simple. One number excludes accrued interest while the other includes it. Knowing the difference will save you from surprises at settlement and will help you compare yields fairly.

First basics you need

Most bonds pay a coupon at regular intervals. Between two coupon dates interest keeps accruing day by day to the current holder. When a bond changes hands the seller deserves the interest that has built up since the last coupon date and the buyer begins earning from the trade date. To make this fair markets split the quote into price and accrued interest.

Clean price: The quoted price that ignores accrued interest. It reflects the market view on rates credit and liquidity without the running interest.

Dirty price: The full price you pay or receive at settlement. It equals clean price plus accrued interest.

Think of clean price vs dirty price as display price versus cash price.

How to compute accrued interest

Accrued interest depends on three inputs. The annual coupon rate the number of days since the last coupon and the day count method in the offer terms. Gilt securities often use actual over actual while many corporates use a 30 over 360 method. The simple way to think about it is annual coupon divided by the days in the year multiplied by days accrued.

Illustration
Face value ₹100
Coupon 8 percent paid semiannual
Days since last coupon 60
Using a 365 day year the accrued interest is ₹8 divided by 365 multiplied by 60 which is about ₹1.32 per ₹100 of face value.

If the clean price on screen is 102.50 the dirty price is 102.50 plus 1.32 which is 103.82. For ₹1,00,000 face value your cash outlay will be about ₹1,03,820 plus costs.

Why markets quote clean but settle dirty

Clean pricing makes it easy to track how the bond value moves with interest rates and credit news. If rates fall the clean price rises even if a coupon is near. Dirty price is used for settlement because money must change hands for both price and the earned coupon share. Dealers compare bonds by clean price while investors must plan their cash by dirty price.

Watch the cum coupon and ex coupon periods

Before a record date a bond can trade cum coupon which means the buyer will receive the next coupon. A few days before record date it may trade ex coupon which means the buyer will not receive the next coupon and the price usually drops by roughly the coupon amount. Check your trade date versus the record date so you know who will receive the upcoming payment.

Practical tips when you invest in bonds

• Confirm whether your screen shows clean or dirty price.
• Compare yields using yield to maturity which is based on dirty price and cash flows.
• If you buy just before a coupon you will pay a higher dirty price then quickly receive the coupon. Look at the net result not the headline price jump.
• Read the day count method in the offer document. It affects accrued interest and small differences can add up on large trades.
• Keep records of accrued interest paid since it may matter for tax reporting.

The bottom line

Clean price tells you how the market values the bond excluding the running coupon. Dirty price tells you what you actually pay or receive. Understand both and you will avoid settlement shocks compare bonds correctly and invest in bonds with clarity and confidence.