The dirty price of a bond (or "full price") is the total, actual amount a buyer pays for a bond in a transaction, which includes both the clean price (quoted market price) and any accrued interest. It represents the true cost, including the interest earned by the seller since the last coupon payment date, which increases daily until the next coupon is paid.
Clean Price is the price of the bond without accrued interest. Dirty Price is the total price paid by the buyer, including accrued interest. Accrued Interest is the interest that has accumulated since the last coupon payment.
Summary
The Clean price is the current price of a percentage-quoted security, such as a bond price excluding accumulated accrued interest. The opposite is the dirty price which includes the accrued interest.
Start by calculating accrued interest using: =(F8/2*F5)*(F6/F7) in any blank cell like F9. Once you've done that, you can find the dirty price by adding clean bond price and accrued interest together via: =O5+O6 .
Dirty price is the total amount paid for a bond at settlement. It equals the quoted clean price plus the accrued interest that has built up since the previous coupon date. Many bond markets quote prices on a clean basis to aid comparison, while the cash exchanged at settlement uses the dirty price.
The bond valuation formula can be represented as: Price = ( Coupon × 1 − ( 1 + r ) − n r ) + Par Value ( 1 + r ) n . The bond value formula can be broken into two parts for better understanding.
A dirty price is a bond quote that includes the bond's cost and the accrued interest from the coupon rate. Bond quotes between coupon payments include accrued interest up to the quote date. Simply put, a dirty bond price has accrued interest, but a clean price does not.
The dirty price is what actually leaves your bank account. It equals the clean price plus accrued interest earned since the last coupon payment. Dirty Price = Clean Price + Accrued Interest. When you buy mid-cycle, you compensate the seller for interest they've already earned.
If the face value of the bond is $1,000 and the quoted price is 97, it means that the bond will sell at 97% of the par value. It can be because the market interest rate would have been higher than the stated interest rate. In such a case bonds sell at a discount. So the bond will sell for $1,000 X 97% = $970.
Clean Price = Dirty Price – Accrued Interest
Clean price is supposed to reflect the intrinsic value of a bond and only the change in the required rate of return based on market yield movement should change the clean price. However, at times clean price used to be distorted by certain market practices.
The convention is that the bond is quoted in terms q of its 'clean' price. – Clean Price = Dirty Price – Accrued Interest. As the bond was bought 12 days after the last coupon date of 11/15/2007, the bond is said to have accrued 12 days of interest have accrued 12 days of interest.
Clean price is the price of a coupon bond which does not include the accrued interest of coupon payments between the coupon payment dates. For calculating the clean price of a bond the future cash flows are discounted to the current time and the accrued interest till date is deducted from it.
The full price is the price an investor pays or receives for a bond when a trade is made, ignoring the effect of the spread.
Real-World Example of a Dirty Price
The bond has exactly five years remaining until maturity, and the last coupon has just been paid. Since there is no accrued interest, the clean price is the same as the dirty price, calculated using the yield to maturity formula, which discounts future cash flows back to today.
The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Warren Buffett views bonds as a safe haven for cash, often recommending a 90/10 portfolio (90% S&P 500 index fund, 10% short-term government bonds) for average investors, while Berkshire Hathaway itself holds large amounts of U.S. Treasury bills for capital preservation and to earn competitive yields, especially when stocks are expensive. He favors short-term Treasuries (T-bills) due to low interest rate risk and high liquidity, using them to park cash while waiting for better stock opportunities, rather than as a primary growth engine.
Such prices are quoted as a percentage of the bond's face value. For example, if the face value is $1000 and the quoted market price is $990, then the bond price is quoted as 99. Similarly, if the market price is $1010, the bond is trading at a price of 101.
Bond valuation, in effect, is calculating the present value of a bond's expected future coupon payments. The theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate.
To find what your paper bond is worth today: