Clean Price

Clean price is the price of a coupon bond which does not include the accrued interest of coupon payments between the coupon payment dates. For calculating the clean price of a bond the future cash flows are discounted to the current time and the accrued interest till date is deducted from it. As the future cash outflow in terms of accrued interest is already excluded, clean price paints a fair picture compared to that of the dirty price. In the US market, bond price is quoted in terms of its clean price only, but the investors pay the dirty/full price unless the bond is purchased on a coupon payment date.

Clean Price = Dirty Price (or Full price) - Accrued Interest

Example:

A  bond has an annualized coupon rate of 7.2% and pays coupons of $36, semi-annually. A trade for 1,000 par value of the bond settles on January 25. The coupon payment dates are January 15 and July 15. Hence, on January 25:

Accrued interest for ten days = $36 * (10 /180) = $2

Suppose bonds are purchased from the market at $985 on January 25. Given that $2.00 pays the accrued interest, the remainder $983 represents the underlying value of the bonds or clean price of the bonds, assuming there is no arbitrage.