Dirty Pricing and Clean Pricing Explained

One potentially set of terms you might come across in relation to bonds are the terms of dirty pricing and clean pricing.

So just what do these refer to and what is the differnce between the two terms?

Well, the bond has itself and the coupon that accrues over time. Now the coupon is given to the holders at periodic times.

The term Dirty Price refers to one that combines the two above elements, and so it will increase gradually as the coupon builds, and then fall when it is ex-dividend or the dividend is paid out.

Clean Pricing is the standard now used in the UK and avoids the bond holder selling at the high point just before dividend payout to avoid the tax implications.

Clean pricing is that where the investor buys the bond at the clean price - and that is just the value of the underlying bond with an allowance made for the interest element of the bond.

And so that is what dirty and clean pricing are and the difference between them, not so complicated once you find out what they actually are!

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