To avoid the impact of the next coupon payment on the price of a bond, this cash flow is excluded from the price of the bond and is called the accrued interest.
Coupons are just the compensation for keeping them
Clean prices are affected by interest rates and credit ratings or companies
Bonds are quoted as either a percentage of their par value, or face value, or in dollar terms. For example, if a bond is quoted at 98, this indicates that it is 98% of the bond’s par value. Therefore, if the bond’s par value is $1,000, the bond price is $980.
Bond prices shown on systems such as Bloomberg or Thomson Reuters are quoted on a clean price basis.
Day-count convention is used to calculate accrued interest between coupon payments. This convention helps to determine the number of days between payment, thus helping with calculation of how interest is accrued over a period. This Read more…