Clean Price
Clean price is the quoted price of a bond that excludes accrued interest — the portion of the next coupon payment that has accumulated since the last coupon payment date — representing the flat price before adding accrued interest to arrive at the full (dirty) price paid by the buyer.
Key takeaways
- Clean Price + Accrued Interest = Dirty Price (the actual cash price paid at settlement).
- Bond prices are universally quoted on a clean basis in professional markets because clean prices better reflect changes in the bond's economic value independent of where the trade falls in the coupon cycle.
- Accrued Interest = Coupon × (Days Since Last Coupon / Days in Coupon Period); day count conventions vary (30/360 for corporate/municipal bonds, Actual/Actual for Treasuries).
- A bond trading at a clean price of $100 (par) with $2.50 of accrued interest has a dirty price of $102.50 — this full amount leaves the buyer's account at settlement.
- During periodic coupon payments, the dirty price drops by the coupon amount (an ex-coupon step-down) while the clean price remains relatively stable, making clean price the more consistent analytical reference.
Explanation
When a bond is traded between coupon payment dates, the seller is entitled to the interest that has accrued during their holding period, even though the next coupon payment goes entirely to the buyer (the registered holder on the ex-dividend date). To fairly compensate the seller for their accrued interest, the buyer pays the clean price plus accrued interest — the 'dirty price' or 'full price.' This separation of clean and dirty price is universal in professional bond markets and enables straightforward comparison of bond valuations across different points in their coupon cycles.
Accrued interest calculation depends on the day count convention specified in the bond's indenture. U.S. Treasury bonds and notes use Actual/Actual (ICMA): AI = (C/2) × (Actual Days Since Last Coupon / Actual Days in Coupon Period). U.S. corporate and municipal bonds use 30/360: every month is treated as having 30 days and every year 360 days, simplifying the calculation. EUR government bonds use Actual/Actual (ICMA). The day count convention affects the accrued interest amount by small but non-trivial amounts, particularly for bonds traded close to coupon payment dates.
The clean/dirty price distinction becomes particularly important for marking bond portfolios to market. If portfolio systems report dirty prices at period end, the NAV will include the accrued interest component, which then drops abruptly on coupon payment dates (when the accrued interest is paid out and accrual resets to zero). This creates an artificial 'step-down' in NAV that does not reflect any change in the bond's economic value. For this reason, professional risk and performance systems typically track clean prices and account for accrued income separately.
Yield calculations depend on which price is used. Yield-to-maturity (YTM) calculations use the dirty price as the bond's cost because the investor actually pays the dirty price at settlement. However, yield quotes in market data systems and Bloomberg are always computed off the clean price convention with the appropriate settlement date accounted for. This means when you look up a bond's yield on Bloomberg, the system automatically adds today's accrued interest to the quoted clean price to compute the correct YTM.
In distressed bond trading (bonds of near-default issuers), a critical transition occurs: trading 'with accrued' (normal convention) to trading 'flat' (no accrued interest added), because the accrued interest is considered unlikely to be paid in full. This transition typically happens when the issuer has missed a coupon payment or is trading at very distressed levels, and the convention shift itself sends a market signal about credit quality.
Formula
Dirty Price = Clean Price + Accrued Interest; AI = Coupon × (Days Since Last Coupon / Days in Coupon Period)
Example
A portfolio manager purchases a corporate bond with a 5.0% coupon, semi-annual payments, $1,000 face value, at a clean price of $98.50 (98.5% of par). The last coupon was paid 45 days ago; the current coupon period has 180 days. Accrued Interest = ($1,000 × 5.0% / 2) × (45/180) = $25 × 0.25 = $6.25. The dirty price (cash payment) = $985.00 + $6.25 = $991.25 per bond. On $1 million face value, the manager pays $991,250. On the next coupon date (90 days later), the manager receives the full $25,000 coupon, of which $6.25 per bond ($6,250 total) represents the accrued interest component effectively recovered through the coupon payment.
Related terms
Accrued Interest Bankers Acceptance Bond Convexity Corporate Bond Day Count Convention Default Dirty Price Dividend Face Value Green Bond Indenture