Definition: The clean price of a bond is the price that excludes accrued interest on the bond since its last coupon payment date. It represents the present value of the bond’s future cash flows, excluding any interest that has accumulated but not yet been paid.
Overview: In bond trading and fixed-income markets, bonds are typically quoted using their clean price. This pricing convention allows investors and traders to more easily compare bond prices across different issue dates and coupon schedules, as it removes the fluctuating component of accrued interest. When a bond is actually purchased, however, the buyer generally pays the clean price plus accrued interest, resulting in the "dirty price" or full invoice price.
Etymology/Origin: The term "clean price" originated in financial markets to differentiate the bond’s quoted price (excluding accrued interest) from the actual payment amount required to purchase the bond (which includes accrued interest). The metaphor of "clean" implies a pure price, free from the temporary and growing component of accrued interest.
Characteristics:
- Quoted without accrued interest.
- Commonly used in financial publications and electronic trading platforms.
- Facilitates consistent comparison between bonds.
- Differs from the "dirty price," which equals clean price plus accrued interest.
- Remains relatively stable between coupon payments, adjusting only for changes in market yield, time to maturity, and credit factors.
Related Topics:
- Dirty price
- Bond valuation
- Accrued interest
- Fixed-income securities
- Coupon rate
- Yield to maturity