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Clean vs Dirty Bond Price Calculator

Calculate the true settlement (dirty) price of a bond by adding accrued interest to the quoted clean price using actual/actual day-count conventions.

Market Quote Parameters

$
$

Accrual Timeline

%
Days
Days

Dirty (Settlement) Price

$988.72
The true mathematical cash amount required to execute.
Clean Subtotal
$980.50
Seller Reimbursement
+$8.22
Accrued Interest

Accrual Timeline Matrix

Last Payout60 Days HeldNext Payout (180)

Mechanics: You are prepaying the seller the $$8.22 they earned over the last 60 days. When the 180-day period officially ends, the bond issuer will deposit the full payment into your account, making you whole on the premium you paid today.

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What is Clean vs. Dirty Bond Pricing?

In the bond market, prices are universally quoted "Clean" (without interest). However, you can almost never buy a bond at its Clean price. When you actually execute the trade, the broker will force you to pay the "Dirty" price. This represents the Clean price plus the exact, daily Accrued Interest the seller is owed for holding the bond since the last coupon payment.

Mathematical Foundation

Dirty Price=Clean Price+Accrued Interest\text{Dirty Price} = \text{Clean Price} + \text{Accrued Interest}
Dirty Price\text{Dirty Price}= The actual cash settlement amount you must pay the broker.
Clean Price\text{Clean Price}= The quoted market ticker price of the bond.
Accrued Interest=F×C×(Days365)\text{Accrued Interest} = F \times C \times \left( \frac{\text{Days}}{\text{365}} \right)
FF= Face Value of the bond.
CC= Annual Coupon Rate.
Days\text{Days}= Exact number of actual calendar days since the last payout.

Laws & Principles

  • The Make-Whole Mechanic: The seller held the bond for two months before selling it to you. They are morally and legally entitled to two months of interest. You pay them that interest upfront in the Dirty Price, and then you get fully reimbursed when the bond pays its full 6-month coupon directly to you later.
  • The Clean Price Illusion: If bonds were quoted in Dirty prices, the chart would look like a volatile sawtooth pattern, plunging violently every 6 months when the coupon pays out (the 'ex-dividend' drop). Quoting Clean prices removes this artificial volatility from the chart.
  • Zero-Coupon Exception: Zero-Coupon bonds (like T-Bills) do not have this mechanic. Because they do not pay periodic interest, their Clean Price is always perfectly equal to their Dirty Price.

Step-by-Step Example Walkthrough

" You buy a $1,000 corporate bond with a 5% ($50/yr) coupon. The quoted 'Clean' price is $980. The last coupon was paid exactly 73 days ago. "

  1. 1. Calculate Daily Accrual Rate: $50 / 365 Days = $0.13698 per day.
  2. 2. Calculate Total Accrued Interest: 73 Days * $0.13698 = $10.00.
  3. 3. Add Accrued Interest to Clean Price: $980.00 + $10.00.
  4. 4. Yield Dirty (Settlement) Price: $990.00.
Final Result: Even though your trading terminal says the bond costs $980, the broker will automatically deduct $990 from your account to make the seller whole on their 73 days of accrued interest.

Quick Answer: Why is there a "Clean" and "Dirty" price for bonds?

Bond prices are universally quoted "Clean" — meaning the ticker price you see on Bloomberg, Schwab, or any trading screen deliberately excludes accrued interest. However, when you actually execute the trade, you must pay the "Dirty" price, which equals the Clean price plus the exact, daily pro-rated interest the seller has earned since the last coupon payment. The reason for this split is simple: if bonds were quoted "Dirty," the price chart would exhibit a violent sawtooth pattern, crashing downward every 6 months when the coupon pays out, making it extremely difficult to track the actual market sentiment of the bond.

Day-Count Convention Reference

The exact calculation of accrued interest depends on which day-count convention the bond uses. Different markets and instruments use different standards, which can result in materially different settlement prices on the same bond.

Convention Used By How It Works
Actual/Actual (ISDA)US Treasury BondsUses actual calendar days elapsed / actual days in the coupon period. Most precise.
30/360US Corporate Bonds, US Agency BondsAssumes every month has 30 days and every year has 360 days. Simplifies calculation but slightly less accurate.
Actual/360Eurodollar Deposits, Money MarketsUses actual days elapsed but divides by 360. Slightly inflates interest earned per dollar.
Actual/365 (Fixed)UK Gilts, some AUD bondsUses actual days elapsed divided by a fixed 365-day year (ignoring leap years).

Pro Tips & Common Trading Mistakes

Do This

  • ✓Always calculate the dirty price before placing a bond order. The cash actually debited from your brokerage account will be the dirty price, not the clean price you see on the quote screen. On a $100,000 face value bond with a 6% coupon, 90 days of accrued interest adds roughly $1,479 to your settlement cost. Failing to account for this can cause insufficient-funds rejections on trade settlement day.
  • ✓Time your purchases near ex-coupon dates. Buying a bond the day after a coupon payment means you pay essentially zero accrued interest (clean ≈ dirty). Buying one day before the coupon means you're fronting nearly 6 months of interest to the seller — money you'll recover, but the cash outlay is temporarily much larger.

Avoid This

  • ✗Don't think accrued interest is "extra cost." You are not losing money by paying the dirty price. You are reimbursing the seller for interest they rightfully earned, and you will be made whole when the bond pays its next full coupon directly to you. It's a timing transfer, not an expense.
  • ✗Don't forget T+1 settlement timing. US bonds settle on T+1 (one business day after trade date). The accrued interest calculation uses the settlement date, not your order date. If you order on a Friday, settlement occurs Monday, adding 2 extra calendar days of accrued interest to your actual cost basis.

Frequently Asked Questions

Do zero-coupon bonds have a dirty price?

No. Zero-coupon bonds (like Treasury Bills and STRIPS) do not make periodic interest payments — they are sold at a discount and mature at par. Because there is no coupon, there is no accrued interest, so the clean price always equals the dirty price.

Is accrued interest taxable when I buy a bond?

When you buy a bond between coupon dates, the accrued interest you pay to the seller is technically a return of capital to you — you'll get it back when the next coupon pays out. The IRS allows you to offset the accrued interest paid at purchase against the first coupon received, so you are not double-taxed. However, the accounting must be tracked correctly on your 1099-INT to avoid overpaying taxes.

What happens to accrued interest if the bond issuer defaults?

If the issuer defaults before the next coupon payment, you lose both the accrued interest you paid to the seller and the future coupon. Accrued interest is an unsecured claim — it is not backed by collateral. This is why buying bonds with large accrued interest balances from financially distressed issuers is extremely risky: you're fronting cash that may never be recovered.

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