The term “dirty price” is commonly used while quoting the price of bonds. Dirty price of a bond refers to the price of a bond inclusive of all the coupons that has been earned by the bond.
So in mathematical form, Dirty Price = Clean Price + Accrued Coupon.
If one has to sell the bonds that he owns before maturity of the bond, he will sell it at its dirty price.
Understand using an Example
Let’s consider a bond of face value Rs.100 with maturity of 3 years and coupon of 9%.
If one has to sell the bond after 2 years of issuance of the bond, then he will sell it at Rs.100+(9% of Rs.100 * 2), i.e. Rs 118/-, which is the dirty price of that bond at that particular point of time.
Present Value of Bond
Dirty prices are the current value or the present market value of a bond. Selling the bonds at the dirty prices ensures that the investor is not penalized for redeeming the bond that he owns before maturity and this provides the liquidity in bonds.
If this were not so, investment in bonds would not have provided liquidity. In the European markets, bonds are often quoted in their dirty prices.
Recommended Read :
- What is a Bond Types of Bonds?
- How to Invest in Bond?
- Basics for Trading in Bonds
- Bonds Vs Fixed Deposits
- Secrets of Making Money From Bond Market
- How to Select The Best Bonds for Investing?
- Difference Between Bond and Debenture
- Facts About Bonds
- How to Make Money By Trading Bonds?
- What is a Savings Bond?
- What is a Callable Bond?
- Difference Between Callable and Puttable Bonds
- Coupon Bond Market
- What are Infrastructure Bonds?
- What are Floating Coupon Bonds?
- What are Corporate Bonds?
- What is Dirty Price?
- What is Clean Price Clean Price Vs Dirty Price?
Thank you for this information. May I ask how and where to find out about all the coupons that have accrued? Then I can use the formula provided to determine if I should sell my bonds or not…
By selling the bonds at dirty price I won’t be penalised for selling them before maturity (premature to the tenure of the bond).