Talk:Dirty price

Untitled

I don't know why this article is deemed to be confusing. So far this has been the best explanation for dirty/clean price that I have found and it helped me tremendously.

84.167.225.189 (talk) 12:45, 20 December 2007 (UTC)

Fair Value

What is the fair value? Clean or Dirty price of a bond? —Preceding unsigned comment added by 213.173.163.2 (talk) 15:31, 16 October 2009 (UTC)

Clean up this page?

I was looking to add some references to this page, and it appears that it could use quite a bit of cleanup. I'd like to get some feedback from others as to whether or not this makes sense, and if it is worth it.

• It is the dirty price that corresponds to the present value of the cash flows. The clean price is then calculated by subtracting out the accrued interest.
• The formula is not really correct. Should it be here at all? Wouldn't it be better to having a link to Bond valuation, where this is described in detail?
• We could actually do more on what is meant by "price", as the term itself often seems to be the source of confusion, having a precise meaning in financial markets as a matter of convention, and often does not match what intuition suggests.

Let me know your thoughts on this. --Rudd73 (talk) 23:57, 1 May 2008 (UTC)

Reversing the 22 June 2010 Revision

I reversed the prior edit, and because it represents a common misunderstanding I'll add some notes here.

The prior edit stated that the "clean price" represents the present value of the future cash flows. To get the full amount that you will pay (the "dirty price") you then add in the accrued coupon interest.

This is incorrect. The "dirty price" represents the present value of the future cash flows. This is covered in the Footnotes, References, and See also links.

You can also do a simple thought experiment to convince yourself of this. If two coupon-paying securities have the same future cash flows (i.e., the same amounts on the same dates) and equivalent risk, you should be willing to pay the same amount for them (i.e., the same "dirty price"). If the market assigns different dirty prices, you can buy the cheaper one and sell ("short") the more expensive one, and you have a risk-free return of the difference in the dirty prices. This is just the no-arbitrage principle (also covered in the links on the page).

The market works on the dirty price basis for this reason (i.e., you make or lose money based on the dirty price). The dirty price fluctuates based on the level of interest rates and credit worthiness of the issuer, but it also fluctuates simply because of the drop after a coupon payment is made (the "saw-tooth" pattern). If you split out the latter (the "accrued interest"), the remaining amount (the "clean price") more closely tracks the changes in economic conditions. For this reason the market has adopted the convention (and that's all it is) of breaking the full market value into "clean price" and "accrued interest" components.

In the example above of two bonds with the same payments, their coupons may have different day count conventions, which means different accrued interest amounts, which in turn means different clean prices. This would not be true if the clean prices represented the present value of the future cash flows.

It is easy to lose sight of this, particularly if you work in Operations, Trade Accounting, or Information Technology. When you receive information on a trade (or have to value a position), you are given the clean price. You then use the bond's day count convention to determine accrued interest. Add the figures together (after figuring in the par amount) and you're back to the dirty price. But this is simply a result of the market convention that disaggregates the two effects in the first place.

Rudd73 (talk) 16:49, 13 July 2010 (UTC)

commissions and fees

The opening paragraph seems bogus as it doesn't relate to the rest of the page.

Slawkenbergius (talk) 08:28, 27 November 2010 (UTC)

I fully agree. I just removed the "fees and commissions" part to improve the most obvious problem. Still more cleanup needed. The "dirty price" is probably best compared to the "clean price" and the difference is the accrued interest. --193.134.254.24 (talk) 08:47, 23 November 2012 (UTC)

I just fixed it by copying the text from the clean price page, just reversed. If there is anything to say about fees, that might be added, but not in the initial paragraph. --193.134.254.24 (talk) 08:54, 23 November 2012 (UTC)