Clean Price and Dirty Price

Clean Price and Dirty Price both are related to Bonds.

A clean Price is a Price which doesn’t include accrued interest. Whereas Dirty Price is the price which includes accrued interest at the time of payment.

When a bond is trading at a high Price in comparison to Face Value and the bondholder wants to sell his bonds then, the actual difference between the prices is called capital appreciation and it is also called clean Price specifically in bonds.

But some bond comes with a coupon rate or interest rate. When a bondholder wants to sell his bonds after holding them for some time, at the time of selling, he is eligible for a coupon rate for the time he is holding the bond. But the company only pays semi-annually or annually whatever is written in Bond Indenture. So the buyer of that bond will pay that interest and this interest is called Accrued Interest. And when included in Clean Price then it becomes Dirty Price

For example – X is holding a $1000 face value, 6% coupon rate, 2year maturity, and annually payment, issued on 1Jan 2021. On 31 March 2021, these bonds are trading at $1050. The X sell these bonds on 31 March 2021.

So, X is holding these bonds for 90 days. He is eligible for 90 days coupon rate of 6%. So we calculate accrued interest for 90 days.

60*90/365 = 14.79 is the accrued interest.

Clean Price = Difference between the face value and sale value I.e., $50.

Dirty Price = Clean Price + Accrued Income. I.e., $50 + 14.79 = 64.79

The buyer of the bond has to pay a Dirty Price to the Seller.