Definition of Dirty Price
In case of bond valuation the bond is valued on different basis, such as zero coupon rates, dirty price, clean price etc. when the price of the bond coupon includes any accrued interest then it is known as dirty price
Definition of Dirty Price
In case of bond valuation the bond is valued on different basis, such as zero coupon rates, dirty price, clean price etc. when the price of the bond coupon includes any accrued interest then it is known as dirty price.Thedirty price of a bond resolve to a cut on the days when the coupons are paid, which would lead to a saw-tooth prototype of the bond. This happens due to the fact that there will be lesser potential cash flow (i.e., the coupon payment would have just come up) at that level.
Hence in case of a dirty price the discounted future cash flows include the interest rate which accrues on the preceding coupon payment scenario. Once the coupon payment is not done this would lead to the clean price be equal to the dirty price.
Formula for Calculating the Dirty Price
Following the formula for calculating the dirty price of the bond where accrued interest refers to the interest rate of the bond and clean price refers to the price of the bond which does not includes the NPV that is the net present value of the all cash flows which would arise in future which includes the accrued interest on the next preceding payment.
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Dirty price is the actual price which is mentioned in order to be bought by an investor, there are several countries which follows dirty price of the bond. Most of the European countries follow this price to calculate the value of the bond.
Dirty Price = Clean Price + Accrued Interest
Hence in simple words the dirty price of the bond refers to the price at which the value of bond is quoted including the accrued interest, which is conversely to the definition of the clean price.
In case of Bloomberg and Reuters terminals the bond is quoted on clean price that is without the accrued interest.
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Comparison of Dirty Price and Clean Price
1. In the short run dirty prices of bond are regarded as more stable than the clean prices.
2. Any instability in case of clean price is clearly due to any change in the economic conditions of an economy such as the change in interest rates or a change in the bond credit quality etc, where as in case of dirty price any instability is a change 