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A clean price is the value of a bond less the accrued interest. When the accrued interest is included in a quote, it is known as the full or dirty price. When bond prices are discussed and quoted, people may use either price. It is important to know whether people are talking about dirty or clean pricing when they are quoting bond values.
A bond has a face value, and it also accrues interest which is periodically paid out. This causes the full price of the bond to vary. When interest has just been paid out, the dirty price and the clean price are the same because no interest has accrued yet. On the other hand, when a bond is halfway between payouts, the dirty price is higher than the clean price because the bond has earned interest, even if it has not yet paid out on that interest.
Quoting bond values in clean prices can provide a more stable way of looking at their value. The clean price should remain relatively even unless there are extenuating circumstances. Thus, a fluctuation in values when clean prices are being quoted is a sign that something is going on and it may be beneficial to take a closer look.
On the other hand, when dirty prices are quoted, the value of the bond rises and falls. On a graph, this looks like a sawtooth. The irregularity of the pricing can obscure underlying trends which may be having an impact on the clean price of the bond. This can be an advantage at some times and a disadvantage at others, depending on how someone is positioned in the market.
In the United States, it is conventional to give quotes in terms of clean prices. Graphs may not always explicitly state this because it is assumed that people will understand which price is being used to provide information about values. If observers want to be certain that they know what they are looking at, it is a good idea to ask. Europeans are more likely to quote dirty prices when providing information about bond values.
When a bond is sold, the buyer will pay the dirty price. This makes it important to be aware of the full price even if someone is primarily tracking clean prices. Sellers want to make sure that they receive a fair value, while buyers want to confirm that they are paying the right price.
what is the mathematical formula to calculate clean price?
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