Also known as: dirty prices · invoice price · full price
Written by attorneys · grounded in primary & secondary sources — see below
The full price paid for a bond that includes both the quoted clean price and any interest that has accrued since the most recent coupon payment date. The buyer pays this amount to the seller in the secondary market between interest dates. Accrued interest is computed by prorating the next semiannual coupon over the days elapsed since the last payment.
Danielle Dixon agrees to buy a corporate bond from Dakota Industries on a date falling between semiannual interest payments. The quoted clean price is 99.5, yet Danielle must also pay the seller the interest that has accrued over the preceding forty-five days. The transaction therefore settles at the dirty price, which equals the clean price plus the prorated coupon amount.
Doris Duffy sells a Treasury note to Decker Electronics midway through an interest period. The parties calculate the dirty price by adding the accrued coupon portion to the flat price listed on the exchange. Decker pays the full dirty price at settlement, ensuring Doris receives compensation for interest earned while she held the note.
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Accrued interest equals the coupon payment multiplied by the number of days since the last payment date, divided by the number of days in the coupon period. The resulting figure is added to the clean price to produce the dirty price the buyer must pay.
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Bonds trade on a clean-price basis that excludes accrued interest. Between coupon dates the seller has earned interest that belongs to the holder of record, so the buyer compensates the seller by paying the dirty price at settlement.
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No. Yield calculations use the clean price. The dirty price merely reflects the immediate cash outlay that includes prepaid interest. The buyer recovers the accrued portion at the next coupon date.
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