Clean and Dirty Bond Prices: Accrued Interest and Market Conventions
Summary
The document explains that the premise of a broad US-versus-Europe difference is mistaken: performing bonds in both markets are generally quoted at clean prices, excluding accrued interest. Dirty prices, which include accrued interest, are more commonly used when bonds are close to default. Some other markets, including Brazil and Argentina, use dirty quotes for performing bonds.
Clean quoting makes price charts easier to interpret. A performing bond’s dirty price rises as interest accrues and drops on coupon ex-dates, creating a zigzag pattern that can obscure changes driven by market movements. Yield or spread series avoid that visual pattern, but clean prices also make it easier to distinguish market-driven price changes from daily carry. The document gives market-convention examples and a rationale, but does not quantify how widely each convention is used.
Key ideas
- Performing bonds in both US and European markets are generally quoted at clean prices.
- Dirty quotes include accrued interest and are used for performing bonds in some other markets.
- Dirty bond prices rise as interest accrues and fall on coupon ex-dates, producing a zigzag chart pattern.
- Clean prices help separate market price movements from changes caused by accrued carry.
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Full text
# Clean vs dirty price for bonds # Clean vs dirty price for bonds Why the clean price is mostly quoted in the US bond markets and the dirty price is mostly quoted in the European bond markets? ## Answer by Dimitri Vulis (score 5, accepted) https://quant.stackexchange.com/a/55635 The premise of your question is wrong. European bond markets usually quote clean prices (without the accrued) for performing bonds - exactly like U.S., Canadian, and most Latin American bond markets. Both in American and in European bond markets, bonds begin to be quoted dirty (with the accrued, total proceeds) only when they are on the verge of defaulting. However there are examples of other bond markets where the market convention for performing bonds is dirty quotes: Brazil, Argentina (even USD-denominated local-law bonds are quited dirty), et al. The main reason why most markets choose to quote clean price is simply that plotting the dirty price of a performing bond against time displays an annoying zig-zag pattern, rising as the coupon accrues, then jumping down on every coupon's ex-date. You can see these zig-zags if you plot against time the price of preferred equity or dividend-paying common equity, that similarly jump down on every dividend's ex-date. The zig-zags go away if you convert the price series into yield or a spread over treasury benchmark or Z-spread etc. However not seeing right away how much the observable price changed just from accruing another day's worth of carry, rather than from something moving in the markets, for example, when you look at Brazil bonds price series, is mildly annoying. ## Answer by Zumba (score 0) https://quant.stackexchange.com/a/55627 No specific reason in that, US Treas and IG Bonds are the most traded FI instrument, like there are difference in swap terms. US treas mkt evolved and then domintaed the Fixd income trading space much earlier.
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