Clean price of a bond is the price that does not take into account the accrued interest on the bond since its last payment date. It equals the present value of the bond's future cash flows minus the interested earned on the bond between the last payment date and the transaction date.
It is also known as flat price. Most financial markets (particularly in the US) quote bonds at their clean prices. Accrued interest is added back to the quoted price to determine the settlement price i.e. the consideration that buyer pays to the seller in exchange of the bond.
If we have dirty price and accrued interest values for a bond, we can find the clean price using the following formula:
Clean Price = Dirty Price − Accrued Interest
Dirty price is the present value of future coupon payments and face value of the bond. Please see article on dirty price for detailed calculation.
|Accrued Interest = Par Value ×||Annual Coupon Rate||×||Days Since Last Payment|
|No. of Periods in a Year||Total Days in Coupon Period|
Please consider the facts given in the example in article on dirty price.
The dirty price was calculated as $1,051.05 being the present value of its future cash flows. In order to find clean price, we must subtract accrued interest from dirty price.
|Accrued Interest = $1,000 ×||3.25%||×||180 − 11||= $15.26|
Clean price = $1,051.05 − $15.26 = $1.035.8
Clean price as per our calculation i.e. $1,035.8 ≈ price quoted by Morningstar i.e. $1,036.1
Written by Obaidullah Jan