What a Bond Is

Clean vs Dirty Price

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Clean vs Dirty Price

The clean price is the quoted price you see everywhere; the dirty price (or invoice price) is what you actually pay, including accrued interest. Both exist to keep market prices stable and comparable.

Key takeaways

Clean price is the bond's price without accrued interest and is what bond traders quote and publish.
Dirty price (invoice price) is the clean price plus accrued interest—the actual amount you pay at settlement.
Clean price stays relatively stable as a coupon date approaches; dirty price rises steadily.
The separation of clean and dirty price prevents the awkwardness of quoted prices jumping on coupon payment dates.
Understanding the difference prevents surprises when you settle a bond trade.

Why two prices exist

Imagine a bond world where only one price exists: the "all-in" price including accrued interest. A bond paying 3% semi-annually ($15 per $1,000 face value on June 15 and December 15) would look like this:

December 16 (one day after coupon): price $1,000 (zero accrued interest)
December 31: price $1,001.24 (15 days of accrued interest)
January 31: price $1,002.50 (46 days of accrued interest)
June 14 (day before coupon): price $1,007.43 (181 days of accrued interest)
June 15 (coupon date): price $1,000 (coupon paid, accrued interest reset)

This quoted price would swing wildly. A trader or investor comparing prices across time would struggle to see if the bond was fundamentally more or less valuable, or if the price swing was just an artifact of the accrual cycle.

The bond market solved this by separating the accrual component from the quoted price. The clean price—the price you see on Bloomberg, your brokerage, bond funds' holdings—removes accrued interest. The dirty price is what you actually pay at settlement.

Clean price: what you see

Clean price is the price a dealer quotes to you and the price that appears in financial databases and news. For example, a U.S. Treasury might be quoted as 101.234 (meaning 101.234% of par, or $1,012.34 per $1,000 face value). This is the clean price.

Clean price is stable around coupon payment dates. It reflects the market's view of the bond's value—what the market is willing to pay for the cash flows, discounted for risk and rates. A bond's clean price rises when interest rates fall (because the fixed coupon becomes more attractive) and falls when rates rise.

Dirty price: what you pay

Dirty price = Clean Price + Accrued Interest

When you settle a trade, you pay the dirty price. If a bond's clean price is 101.50 and accrued interest is 0.75, your invoice price is 102.25. You send 102.25% of par to the dealer; they send you the bond.

The dirty price is sometimes called the "invoice price" because it appears on your invoice or confirmation. It's the actual cash you owe.

The mechanics of clean and dirty around coupon dates

Here's a concrete timeline for a bond paying 4% annually in semi-annual installments on March 15 and September 15 (coupon of $20 per $1,000 face value):

March 16 (day after coupon): Clean price might be 100.50. Accrued interest is near zero. Dirty price ≈ 100.50.
April 15 (31 days later): Clean price remains 100.50 (assuming no rate or credit changes). Accrued interest accumulates: $20 × (31/183) = $3.39. Dirty price ≈ 103.89.
May 15 (61 days after coupon): Same clean price 100.50. Accrued interest: $20 × (61/183) = $6.70. Dirty price ≈ 107.20.
September 14 (day before coupon): Clean price 100.50. Accrued interest: $20 × (182/183) = $19.89. Dirty price ≈ 120.39.
September 15 (coupon date): Coupon is paid. Accrued interest resets to zero. Dirty price ≈ 100.50 (assuming clean price hasn't moved).

Notice that the clean price stays relatively flat (if no other market conditions change), but the dirty price rises predictably. This demonstrates why separating them matters: the clean price is the "true" market price, and the accrual component is mechanical.

Real-world example: Treasury bond pricing

Suppose you look at a Treasury bond online and see a clean price of 99.50. The bond pays 2.5% annually, with coupons on March 15 and September 15. You check on May 1—61 days into the March-to-September period (184 days total).

Accrued interest = $12.50 (semi-annual coupon) × (61 / 184) = $4.15

Dirty price = 99.50 + 4.15 = 103.65

If you buy $100,000 face value:

Clean price invoice: $99,500
Accrued interest: $4,150
Total you pay: $103,650

Alternatively, you could wait until after the September 15 coupon is paid (September 16), at which point accrued interest resets to nearly zero, and the dirty price is nearly equal to the clean price. But waiting two months means missing the coupon payment that accrued interval—unless you buy on the ex-coupon date (the date you must own the bond to receive the next coupon). That's a separate but related concept.

How dealers quote prices

When a bond dealer contacts you with a quote—say, "101.50 bid, 101.75 ask"—they're quoting the clean price. The bid-ask spread (25 basis points in this example) applies to the clean price. If you accept the ask, the dealer will calculate accrued interest and invoice you for clean price + accrued interest.

Large institutional traders negotiate the spread on clean price, not dirty price. A big hedge fund might get a tighter spread because they trade size and frequently. The accrued interest component is not negotiable—it's a mechanical calculation based on the accrual period and day-count convention.

Accrued interest calculations: day-count conventions

The exact accrued interest depends on which day-count convention the bond uses. U.S. Treasuries use Actual/Actual (the actual number of days divided by the actual days in the coupon period). Corporate bonds often use 30/360 (assumes 30-day months and 360-day years).

For example, if 92 days have elapsed in a 184-day coupon period:

Actual/Actual: $20 × (92/184) = $10.00
30/360: calculation might yield $9.98 (due to the month-day standardization)

The difference is small but not negligible over many bonds. The specific day-count convention is disclosed in the bond prospectus and confirmed when you trade.

Municipal and corporate bonds

For municipal bonds and most corporate bonds, accrued interest and dirty-clean separation work the same way. However, municipal bonds have unique ex-coupon conventions. In some cases, an ex-coupon date occurs a few days before the coupon payment date, meaning you must buy the bond several days early to receive the next coupon.

Corporate bonds in the U.S. market are typically ex-coupon as of the coupon payment date (meaning you must own it on or before that date). This differs from stock ex-dates, which are usually a few business days before the actual payment.

Impact on returns and reinvestment

If you're calculating your return on a bond investment, you must account for both the price change (clean price movement) and the accrued interest you paid. If you bought a bond at clean price 100, paid accrued interest of 2, and sold at clean price 102 with accrued interest of 1:

Proceeds received = 102 + 1 = 103 Total invested = 100 + 2 = 102 Capital gain (on clean price) = 2 Accrued interest recovered = 1 Total return = 3 on a 102 investment

Understanding this breakdown helps you identify whether your returns came from price appreciation, coupon collection, or the mechanics of selling at different points in the accrual cycle.