Dirty price is a term used for a bond’s value, excluding commissions or other additional costs. However, the dirty price does include the accrued interest, either since the bond was issued or since the most recent coupon payment.
An investor who purchases a bond can expect to receive payments, depending on the set schedule. In between scheduled payments, interest accrues, depending on the coupon rate of the bond, as well as on the period of time since the last payment issued. As such, the dirty price of the bond increases as it approaches the day of the next scheduled payment. On the date the coupon is paid, the dirty price of the bond goes down. This is because the payment received by the investor reduces the cash flow to be expected in the future.
On the other hand, a bond’s clean price is the bond’s price, excluding the accrued interest. As such, the clean price of a bond does not change as easily as the dirty price. This value is therefore regarded as the more stable one between the two. Clean prices may change as a result of economic fluctuations, and not as a result of coupon payments.
Due to its stability, it is the clean price which is quoted when issuers or investors discuss the value of a bond. Furthermore, monitoring a bond’s clean price can provide more useful information to investors, because changes can be good indicators of issuer risks and other more relevant economic considerations.
Dirty price may also be used interchangeably with the term “full price.”
