Explain: What clean and dirty prices do you tell about binding

Copyright © HT Digital Streams Limit all rights reserved. Bond Math 101: Clean versus dirty prices, and why investors should know the difference when buying a mortgage, the price you see is not always the price you pay. (AI-generated image) Summary bonds traded at ‘clean’ prices, but investors pay the ‘dirty’ price that includes accumulated interest. Here is why the distinction is important to compare effects and timing. If you are looking for a mortgage price on a trading screen, it is not always what you pay. Effects are quoted at the clean price, but the actual settlement amount is the dirty price. The difference lies in accumulated interest. A Bond usually pays interest, or coupon, at fixed intervals in most cases half annually. Between these coupon payment dates, interest is still being up to day. If the mortgage is sold in the middle of this cycle, the seller has already earned a portion of the upcoming coupon. To compensate for this, the buyer does not just pay the quoted market price plus the accrued interest. To illustrate, suppose a mortgage prices £ 1,000 has an annual coupon rate of 10%, which means £ 50 coupon semi -annually (annually £ 100). If the mortgage is sold exactly three months after the last coupon payment, the seller has already raised half of the coupon – £ 25 – even if it has not yet paid. The buyer therefore pays the dirty price – clean price (the cited market value of the mortgage) plus the accrued interest of £ 25. In this case, it would be £ 1,025. The clean price is often considered the ‘pure’ market value of the mortgage, stripped of any interest that has accumulated since the last coupon date. This is the figure you will be quoted on exchanges. For investors, the distinction is important. Quoted prices or clean prices help compare bonds on a similar basis without being distorted by coupon timing. How Clean Price moves the clean price shows the value of a mortgage based on the current interest rates in the market. The clean price changes with the interest rates of the market. As rates fall, the prices of bonds rise, and as rates rise, the prices of the mortgage will fall. Here is an example of clean prices in action. Imagine buying a mortgage worth £ 1,000 that pays a coupon of 10% annually. How the price of this connection moves depends on what’s going on in the market. If interest rates in the market fall and new bonds pay only 9%, your mortgage looks suddenly more attractive because it still pays £ 100. Investors will be willing to pay extra to get the higher return and the price of your mortgage will rise. On the other hand, if interest rates rise and new bonds offer 11%, your mortgage becomes less attractive. To make up the lower interest, investors will only buy it at a discount. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Interest -Tariffs #Bonds Read Next Story